Monday, October 13, 2014

CFTC Chair Vows to Work with New E.U. Financial Services Commissioner on Cross-Border Swaps Regulation

CFTC Chair Tim Massad committed to working with his E.U. counterpart on harmonizing cross-border derivatives regulation. In an interview at the Financial Services Roundtable Global Summit, the CFTC Chair said that he looks forward to working with the E.U. Financial Services Commissioner-designate, Lord Hill, on issues of equivalence and substituted compliance around OTC derivatives regulation. Chair Massad said that he would reach out to Lord Hill after the E.U. Parliament confirms him as Commissioner for Financial Services, Financial Stability, and Capital Markets, which is now expected to occur by November 1.

Chair Massad that cross-border regulatory harmonization is a difficult challenge since it must go through nation states with different philosophies and legal traditions.

On the recognition of derivatives clearinghouses, he noted that E.U. authorities have not yet recognized U.S. clearinghouses as equivalent. They should do so as soon as possible, he advised. The CFTC Chair observed that clearinghouses are registered in a number of countries. The rules should be harmonized. The risk of fragmentation came when the E.U. said they would impose capital charges if they do not recognize a U.S. clearinghouse.

Chairman Massad pointed out that CFTC rules protect U.S. customers and are tied to the U.S. Bankruptcy Code. For example, if a futures commission merchant (FCM) defaults, bankruptcy rules provide for the transfer to another intermediary in order to ensure customer protection and avoid a cascade of defaults.

There is now mandated clearing of some swaps, noted the Chair, but there will always be uncleared swaps due to, for example, a lack of liquidity or new products. The CFTC is working with the Fed and the E.U. on margin for uncleared swaps to ensure that the rules are very similar. He added that margin for uncleared swaps is a big part of risk mitigation.

The Chair also mentioned a recent federal court ruling recognizing that the some oversaes derivatives activity could import risk into the U.S. and endorsed CFTC rulemaking to address that scenario. He added that E.U. authorities have the same view as the CFTC that the derivatives market is a global market and that market participants can do things in one jurisdiction that impacts another jurisdiction.

Finally, Chairman Massad spoke on CFTC resources and budget constraints. He noted that the OTC derivatives market is eight times the size of the futures markets, and Congress has given the SEC the challenging job of regulating this market. The CFTC is building the infrastructure to facilitate a big date collection effort, he observed, and the budget challenge makes this job harder. For example, he pointed out that the CFTC cannot examine large derivatives clearinghouses as frequently as it would like to on what he described as a very small budget.

No comments: