Friday, April 05, 2019

Chairman Giancarlo advances his vision for global derivatives regulation in his final European tour as CFTC leader

By Brad Rosen, J.D.

In one of his final speeches to European counterparts at the Eurofi Financial Forum, CFTC Chairman J. Christopher Giancarlo articulated a framework for global financial regulators in a speech titled A New Vision For EU-US Regulatory and Supervisory Cooperation for Derivatives Markets.

The chairman’s remarks centered around his core assertion that regulatory cooperation between European and U.S. policymakers is a priority that ensures financial markets continuing to support the growth of mature market economies and increased prosperity for its citizens. Failing to cooperate, Giancarlo observed, “will stunt the efficiency of our markets, producing fragmentation and denying our firms, businesses and farms the necessary capital and risk hedging tools needed to increase productivity . . ."

In somewhat of a departure from the Trump Administration’s hostility and reservations regarding international commitments and cooperative undertakings, the chairman expressed his unbridled optimism that the U.S. and Europe, by working together “can show the rest of the world the benefits of free and open markets underpinned by sound regulation and strong enforcement.”

Addressing historical difficulties. Chairman Giancarlo also recognized Europe and the U.S. have not always found it easy to cooperate on matters of financial regulation, and conceded that some fault may rest with the CFTC. Specifically, the chairman admitted that the CFTC could have been seen to have started the current rift in cross-Atlantic swaps cooperation with its 2013 cross-border guidance which imposed CFTC transaction rules on swaps traded by U.S. persons even in jurisdictions committed to implementing G-20 swaps reforms.

Giancarlo acknowledged that this approach alienated many overseas regulatory counterparts and squandered important American leadership and influence in global reform efforts. The chairman identified the steps he has taken as chairman to address the CFTC’s expansive approach to applying its swaps rules to cross-border activities, and the detailed program he has laid out to remedy the errors of past policies.

The time has come to rebuild trust. The chairman also shed light on some measures taken and efforts towards increasing transparency and rebuilding trust among regulators in the U.S., Europe and Asia. These include:
  • issuing detailed white papers laying U.S. leadership’s views on the regulation of swaps execution facilities, the effectiveness of the CFTC’s implementation of the Dodd-Frank Act, and cross-border policies. One purpose of these white papers is to inform global regulatory counterparts of the direction of U.S. policies and the principles upon which that direction is set; and
  • the CFTC becoming an increasingly active, engaged and positive participant in international standards setting activities. Today, the CFTC participates in more international work streams than ever in its history. The agency is an active contributor to the International Organization of Securities Commissions (IOSCO), Financial Stability Board (FSB), and IOSCO’s joint work with the Committee on Payments and Market Infrastructures and Basel Committee on Banking Supervision. 
A commitment to shared principles. Chairman Giancarlo also pointed to a number of shared principles which serve as a key ingredient to successful regulatory and supervisory cooperation. These include:
  • a commitment to market-based solutions. When facing common regulatory challenges, the U.S. and Europe should see how its rules and policies can help make the markets work better and more efficiently;
  • a commitment to open markets and competition. Both European and U.S. policymakers have a common interest to make its respective markets the most effective places to trade and to do business; and
  • a commitment to outcomes-based deference. That can be through equivalence and recognition decisions or through substituted compliance orders and exemptions. In the chairman’s view, this is the only rational way to ensure that jurisdictional rules can work constructively to provide sound regulation for cross-border trade, investment and risk mitigation. 
Difficult challenges remain. While expressing a generally optimistic outlook for the future relations among financial regulators, Giancarlo was also mindful of considerable obstacles and challenges confronting regulators in the global arena. Some of the chairman’s concerns include:
  • The European position with respect to EMIR 2.2, and the longtime unwillingness by the European Commission to acknowledge any commitment to the 2016 agreement between the CFTC and EC on CCPs;
  • Insulating market regulation from politics. Market regulation must focus on investor protection, the safety and soundness of market utilities, and the efficiency of trading markets. When, instead, domestic politics determines regulatory priorities, and interferes with the operation of the market—then cross border regulatory and supervisory cooperation is challenged. According to Giancarlo, regulatory cooperation works best when it is conducted free of political considerations;
  • The need for honest and frequent communication among regulators. The chairman noted that much depends on the day-to-day relationship of the people who serve the different authorities, and the need to be honest brokers and truthful interlocutors. In his view, when these elements are not present, cooperation has little chance. 
In closing, Chairman Giancarlo summarized that he looks toward to a future where Europe and the U.S. grow markets that support prosperity and encourage innovation, and which include the shared principles of market-based solutions, healthy competition and regulatory deference.