US-Europe derivatives rulemaking deal “falls at first hurdle”

Belchambers: transatlantic cooperation needs more than just words

Senior financial industry executives have expressed disappointment at the failure of the US and European securities regulators to realise a deal over derivatives reforms and swap execution facilities, the new category of US execution venues brought in under the Dodd-Frank Act.

“The Path Forward document has failed at the first hurdle,” said Anthony Belchambers, chief executive at the Futures and Options Association in London. “It’s all very well making speeches about cooperation, but words and agreements need to be followed by actions. If regulators on both sides are really serious about transatlantic progress, the issues for SEFs need to be sorted out and it’s just not been happening.”

Belchambers was referring to a deal signed in July between the European Commission and US regulator the CFTC, under which both sides effectively agreed to recognise the other’s rules as equivalent in certain circumstances. The deal was hailed at the time as a significant breakthrough and a sign that global coordination towards the G20 agreement on derivatives reforms was working.

However, on 2 October new US rules requiring virtually all firms that trade derivatives to register with a Swap Execution Facility took effect, with no exemption or delay for non-US firms. Just days before the deadline, EU commissioner Michel Barnier sent a letter to the CFTC’s Gary Gensler asking for more time until an EU-US deal could be worked out. No reply came in time and the European Commission is now concerned that European firms could be liable under the US rules.

Adding to the complications, the US government shutdown caused by internal political wrangling over the budget has left the CFTC with a skeleton staff of just 30 personnel deemed ‘essential’. Last week, the European Commission told Banking Technology of its concerns that the US shutdown was hampering the prospects for a deal.

“Barnier was right to ask for more time,” said Belchambers. “The reality is the US is ahead of Europe. That means either the EU has to catch up – which is unlikely, given the complexity and sovereign powers of its member states – or the US has to slow down. Unless there’s a rationalisation, you get extra-territorial problems. I can only hope that IOSCO will get a grip on this, because these international disputes really do have to be sorted out.”

The International Organisation of Securities Commissions is an association of regulators from 100 different member countries. IOSCO’s main purpose is to promote high standards of regulation and provide a forum for national regulators to cooperate with each other. The organisation is due to release its next set of regulatory principles in Q2 next year. Belchambers has high hopes that IOSCO could be the intermediary that helps to bring progress. However, he acknowledges that the fact that the organisation can issue guidelines, but has no enforcement power, is a potential stumbling block.

“Really, IOSCO needs to have an enforceable mandate,” said Belchambers. “We mustn’t lose sight of the fact that the G20 has been calling for coherence and international cooperation time and time again, and yet when it comes to the details, the regulation gets badly fractured at a national level. IOSCO needs a stick to wield.”

In the spirit of transatlantic cooperation, the London-based Futures and Options Association formed its own merger agreement with the US Futures Industry Association in June. Both organisations are representative bodies that can express the voice of their members, but do not enforce regulatory policies.