By Lene Powell, J.D.
CFTC Commissioner J. Christopher Giancarlo criticized the CFTC and U.S. banking regulators for proceeding with a September 1 start date for certain margin requirements for uncleared swaps even though the U.S. is ahead of most other jurisdictions in implementing globally agreed margin standards. Sticking to the “arbitrary” deadline will likely allow overseas competitors to take tens of billions of dollars of business from U.S. firms, and will weaken the ability of U.S. regulators to get other jurisdictions make progress on implementation, warned Giancarlo.
“This is yet another example of the failure of U.S. policymakers to negotiate harmonization in regulations as called for in the September 2009 G-20 Leaders’ Statement in a manner that does not place American markets at a competitive disadvantage,” Giancarlo wrote in a statement.
Uneven implementation. Giancarlo noted that the U.S., European Union, and other countries jointly agreed to a framework by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) that established standards for margin requirements for uncleared swaps and a timeline for phased-in implementation. Under this agreed timeline, certain margin requirements should begin as of September 1 for all jurisdictions.
The CFTC and U.S. prudential regulators (the FDIC, Federal Reserve, and others) have adhered to the September 1 timeline. However, the E.U., Australia, Hong Kong, and Singapore have since announced a delay in their implementation. In fact, the Financial Stability Board recently reported that just three of 24 jurisdictions will have uncleared swap margin requirements in force as of September 2016. Only Canada and Japan are joining the U.S. in keeping a September 1 start.
Competitive disadvantage for U.S. According to Giancarlo, beginning U.S. margin requirements on September 1 will lead to a higher margin structure than most of the rest of the world, giving major overseas derivatives markets a competitive advantage over American markets. As a result, overseas competitors will likely be able to take tens of billions of dollars in new customer business from U.S. firms. In turn, these new revenues will create an enormous incentive for European and Asian dealer firms to put pressure on their respective regulators to postpone future implementation of the margin rules. And U.S. regulators will lack negotiating leverage to pressure overseas regulators if there are further delays, said Giancarlo.
Other negative possibilities Giancarlo sees include U.S. industrial and other companies being at a disadvantage compared to overseas counterparts in their use of uncleared swaps to hedge risk. U.S. businesses may face higher costs, or may choose not to hedge their risks—undermining the purpose of the margin requirements and Dodd-Frank to reduce systemic risk.
Also, swap dealers are facing enormous challenges in finalizing account documentation by the deadline, Giancarlo said, adding that some have warned a liquidity crunch may result because certain dealers will not be ready to trade with other dealers.