MFA Blog: European and U.S. Regulators Disagreement Could Delay Rules Regarding Swaps (with Lofchie Comment)

Regulators in the United States and the European Union are in disagreement as to jurisdiction over clearinghouses for the derivatives markets, according to an MFA blog post. The controversy could result in a delay in implementing a cross-border framework for swaps rules.

According to the original story, published in Reuters, regulators are in disagreement about how clearinghouses should operate in other jurisdictions. Specifically, according to the Reuters story, the CFTC is not budging on its position that European clearinghouses must comply with U.S. rules when operating in America, rather than complying with their local regulator rules.

The impasse could result in delaying the deadline for a suitable global framework for swaps.

Lofchie Comment: The dispute among regulators over jurisdictional issues raises basic questions over the use of clearinghouses. Rather than decisions as to risk being made in a decentralized manner that permits for varying opinions, the move to clearinghouses centralizes such decisions, both as to the risk of a position and as to value of collateral that is used to secure the position. There is no reason to believe that such centralized decision-making will be more accurate than dispersed decision-making by market participants who have independent views of such matters. To the extent that it is a single government that makes (or controls or oversees) such decisions, the danger of being wrong is amplified. Some argue that the government will simply set rates sufficiently high so that there is no cause to worry about the risk of the clearing corporations. That argument is flawed. If clearing margins are set too high, market participants will either allow risks to go unhedged or they will be discouraged from engaging in economic activities. The CFTC has taken the position that it alone has the market expertise to appropriately regulate clearing corporations. In fact, it has far less internal expertise than many of the non-U.S. regulators whose judgements it will not accept. The CFTC itself has admitted that it does not have internal expertise to evaluate the quality of firms' economic capital models. Against this background, wouldn't it be better for the CFTC to allow for a greater diversity of views, including views of other regulators?

See: MFA Blog.