Will the US need to toughen derivatives regulation?
US financial institutions could be excluded from European markets if tougher regulation is not enacted to follow the European Union’s lead.
The US Commodity Futures Trading Commission (CFTC) has warned that EU rules will mean tighter US derivatives regulation.
EU lawmakers are stiffening legislation after the Libor and forex rate rigging scandals, going well beyond the benchmarks agreed by the International Organization of Securities Commissions (IOSCO).
CFTC chairman Tim Massad told Reuters that these EU benchmark proposals “would have adverse market consequences” as banks and asset managers in Europe would not be able to access products from countries that did not meet the same standards.
Effectively EU banks would be locked out of thousands of products traded on US futures exchanges and swap trading platforms, according to Massad.
Indeed the US seems to be behind the curve here. In October the European Commission adopted its first 'equivalence' decisions for the regulatory regimes of central counterparties (CCPs) in Australia, Hong Kong, Japan and Singapore.
It means the CCPs in these jurisdictions will be able to obtain recognition in the EU, and be used by market participants to clear standardised OTC derivatives as required by EU legislation and set out in Article 25 of EMIR, while being subject solely to their own domestic regulations.
Speaking at the time, EC vice-president Michel Barnier said the commission is “willing to defer to the regulatory frameworks of third countries, if they meet the same objectives as EU rules”.
He also pointedly said this includes the US. “We are in close and continued dialogue with our colleagues at both the SEC and CFTC as we develop our assessments of their respective regimes and discuss their approaches to deference.”
However, the US does not necessarily have to go as far as the EU. The EC says that all it requires are for the relevant rules operating in the third country to “satisfy the same objectives as in the EU”, which it describes simply as “a robust CCP framework promoting financial stability through a reduction in systemic risk”.
It does not mean that identical rules are required to be in place in the third country. The EU and US may yet agree a workaround that does not disrupt markets.
More on derivatives regulation can be found at Hatstand Insights.