U.S. and EU regulators have reached a landmark deal on policing derivatives trading, in a breakthrough that carves up responsibilities and avoids a messy impasse that would have disrupted global markets.
The agreement brings to a close a year of complex and fraught talks, which pitted the U.S. against European finance ministers and opened a difficult rift within the Commodity Futures Trading Commission.
A package of measures put the EU and the U.S. on a path to recognize each other’s rules as essentially the same, so that they can rely on the relevant domestic authorities to apply and enforce them.
It paves the way for the CFTC’s cross-border guidance to be adopted, ending a fractious chapter in its three-year process of writing rules to rein in the $633-trillion (U.S.) swaps market.
Commissioners have scheduled a vote on Friday, the same day an exemption from transaction rules expires for foreign swap dealers such as Deutsche Bank AG and foreign branches of U.S. banks.
Officials feared that without a deal there would have been heavy consequences for the transatlantic financial markets, which put a heavy administrative burden on banks, created unresolvable conflicts of law and forced two big European clearing houses to stop handling U.S. trades from this weekend.
“The CFTC and the European Commission share the view that jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes,” the regulators said in a joint statement.
Gary Gensler, CFTC chairman, who had urged strict oversight of foreign trading to ensure blow-ups abroad do not hit the American taxpayer, said the deal was a “significant step” in the “mutual journey to bring transparency and lower risk to the swaps market worldwide.”
Michel Barnier, the EU commissioner responsible for the reforms, added: “our discussions have been long and sometimes difficult but they have always been close, continuous and collaborative talks between partners and friends.”
Under the deal, the CFTC plans to issue a “no action relief” for certain transaction based requirements for uncleared swaps, on the basis that the U.S.-EU rules are “essentially identical”.
This relief will allow groups falling under the U.S. rules to choose whether to apply U.S. or EU rules – an option that will be extended to EU groups operating in Europe after an “equivalence” decision is formally taken by the European Commission.
To put the relief on a more formal footing, the CFTC agrees once discussions are concluded to ensure “the substance of relevant relief” is “reflected in the relevant guidance”.
The oversight of trade execution is put into a transition, as the EU lawmaking process catches up with implementation in the U.S. Officials were concerns that the U.S. moving first would suck liquidity out of Europe, because trades would have to move to US regulated venues.
The compromise offers “transitional relief” – through a CFTC no-action letter – to certain EU-regulated multilateral trading facilities – a move that effectively gives the EU until March to agree its revised regulation on financial markets.
On clearing houses, the two sides edged towards resolving differences over margin requirements, which are tougher for operators in the EU, saying they would “work together to reduce any regulatory arbitrage opportunities”.
Deutsche Börse’s Eurex and LCH.Clearnet will be given until the end of the year to complete their registration with US authorities – extending a deadline that would have forced the groups to close down their U.S. businesses from this weekend.
A final piece of the deal addresses U.S. concerns over loopholes that would permit U.S. companies to engage in high risk operations overseas, while relying on the safety net of U.S. taxpayers.
The two sides said they shared “common goals of ensuring that the overseas guaranteed subsidiaries and branches of US and EU persons are not allowed to operate outside important G20 reforms”.
This is to be addressed in guidance from EU regulators, alongside measures to harmonize approaches to so-called “straight through processing” of trades and rules for uncleared swaps.