Monday, September 10, 2018

Giancarlo again implores EU counterparts to embrace supervisory deference in cross border relations

By Brad Rosen, J.D.

Echoing prior calls for extending supervisory deference among regulatory regimes, CFTC Chairman J. Christopher Giancarlo again advocated for increased cooperation with European counterparts in connection with swaps oversight. In a speech before the Eurifi Financial Forum in Vienna, Austria, the chairman observed, “Effective cross border relations are central to the mission of the CFTC because of the global nature of the futures and derivatives markets which the CFTC regulates…We policymakers and regulators have a shared interest and responsibility to ensure our markets are vibrant, efficient and value-enhancing.” He added, “Our common interest and mission mean we should be working together and not apart.”

Giancarlo’s measured remarks stand in stark contrast to the warning he issued to the European Commission in November 2017 about potentially serious consequences for U.S. businesses and consumers in the wake of EC proposals allowing European supervisory authorities to regulate financial entities outside of the EU. Those comments came in the wake of the EC’s response to Brexit-related developments.

Regulatory deference in action. Noting that regulatory deference is not just a slogan, the chairman identified specific areas in the cross-border market context where the approach can be applied. These include the regulation of swaps trading venues, central clearinghouses, and swap dealers. Giancarlo added, “We have a rare and precious opportunity to trust one another; to put into place contemporaneously laws, rules and regulations that enshrine regulatory and supervisory deference in how we treat third country firms and transactions.” The chairman also shared his vision for CFTC-EU regulatory coordination “that would focus on ensuring consistently high-quality regulatory outcomes across our respective markets while respecting the differences in laws and regulations that are necessary to support the unique characteristics of our local markets.”

A mixed picture. The chairman pointed to recent advances in the regulatory deference realm noting, the 2016 agreement between the EU and the CFTC on the regulation and supervision of CCPs, as well as their 2017 agreement regarding the regulation of trading venues and uncleared margin requirements.

Still, the chairman also articulated concerns with recent proposals and pronouncements in the EU regarding financial regulation and supervision of third country firms. He observed, “Current EU legislative proposals on CCP supervision are going in a different direction. These proposals, when understood alongside comments from some European officials, raise doubt about continuance of the policy of deference.”

A call to action. Notwithstanding these contrary sentiments, Chairman Giancarlo was unambiguous in his call for action from his European counterparts, declaring, “Now is the time to expand the use of equivalence and recognition. The EU should commit to an equivalence determinations process that focuses on achieving comparable regulatory outcomes and not rule-by-rule exactitude.” The chairman also noted his concerns “that decisions may be made in the next few months that will end up having a deleterious effect on transatlantic financial trade.” In Giancarlo’s view, the ball is ultimately in the Europeans’ court. He noted, “The choice of approach is yours to make.” He added, “I sincerely hope that we all recognize the unique opportunity before us to achieve true regulatory coordination between the U.S. and Europe.”

The chairman’s pledge. Giancarlo committed to European policymakers and regulators that he will embark the CFTC on the course of greater regulatory deference, including concrete proposals to further open up the CFTC regulatory regime to European firms and markets. The chairman indicated his proposal seeks to recognize the power and authority of EU authorities to regulate and supervise the European market with limited involvement from the CFTC. Some of these proposals will be articulated in Chairman Giancarlo’s recently announced white paper which will focus swaps regulatory reforms.

The chairman concluded his remarks by indicating that the course for regulatory deference he set for the CFTC will be robustly debated in the U.S., and the prospects for its implementation will in hinge in large part on the European Union pursuing a similar approach. Giancarlo called on the Europeans to make the right choice and to express that choice with clear statements and clear legislative and regulatory actions.