CFTC Commissioners Lash Out at EC Clearing Proposals

US regulators have reacted angrily to an effort by European officials to rework a 2016 equivalence agreement on the regulation of central counterparties (CCPs).

The European Commission (EC) issued a proposal last June that would extend the authority of the European Central Bank and European Securities and Markets Authority (Esma) over any CCP that is deemed to be systemically important to the EU due to the amount of euro-denominated business it clears.

The move is part of the EC’s broader policy response to Brexit and was initially assumed to be targeted purely at London-based LCH, which clears the vast majority of euro-denominated interest rate derivatives. However, the Commodity Futures Trading Commission (CFTC) has since been informed that the EC proposal would also affect US clearing houses that are covered by the 2016 equivalence agreement.

CFTC commissioner Brian Quintenz delivered a blistering attack on the EU’s position—which he called “a clear breach of our [equivalence] agreement”—at the Futures Industry Association’s annual conference in Boca Raton yesterday (March 13). 

“The EC’s proposal is unacceptable to the CFTC. It is unacceptable to the United States Treasury Department. It is unacceptable to senior United States senators. And it is unacceptable to the White House, itself,” Quintenz said. “The entire United States government is steadfast in its opposition to the EC’s proposal.”

Those sentiments were echoed by CFTC chairman Christopher Giancarlo in his keynote address at the same conference earlier today (March 14). Given the uncertainty of the future relationship between the UK and the EU, “embracing deference and cooperation between Europe and the United States is the only sensible path forward,” Giancarlo said.

Rostin Behnham, a Democratic commissioner at the CFTC, joined his Republican colleagues in condemning the EC proposal. “I have heard repeatedly that a sovereign nation has the right to amend its rules and the right to renegotiate agreements,” he said in a speech at the FIA conference on March 13. “I agree, however, our CCPs will not be collateral damage in the ongoing Brexit battle between the UK and the EU.”

Within the CFTC, concerns about the EC’s proposals have been brewing for some time. Giancarlo is said to have raised the issue during his visit to the European Parliament in early 2018, where he received a positive reception. However, when CFTC officials asked their EC counterparts about the intent of the proposal and whether the 2016 equivalence agreement would stand, they were told bluntly that it would not, according to people familiar with those meetings.

Spokespeople for the EC, however, denied that the agreement would be cancelled.

“The Commission continues to attach great importance to regulatory cooperation with the United States. Our legislative proposals are not targeted at individual third countries but are designed to protect financial stability while maintaining international convergence,” says Vanessa Mock, a spokesperson for the EC. “In this case, the rules have in many respects been based on the US model for supervising third country CCPs, so they should hopefully lead to rather more than less convergence and deference. We hope to continue building on our good cooperation with the US in future.”

 ​​EC documents released at the same time as the June 2017 proposals stated the new approach would not “question the existing equivalence decisions adopted so far” by the EC – “in particular”, the transatlantic deal agreed in 2016 with the US. This stance was reiterated at the FIA event by Kay Swinburne, a member of the European Parliament: “The equivalence decision that we have – the 2016 agreement between the EU and the US – will not be touched. It will be maintained because the country-by-country equivalence will stay.” What is changing is that US CCPs deemed to be systemically important will need to submit to “a level of direct supervision by the EU, which is company specific, not country specific. So there is a difference here,” she said.

The stand-off has also sharpened fears that the EU is prepared to renege on other agreements in response to political developments, according to sources familiar with the CFTC’s thinking.

Any abrogation of the equivalence deal, which took years and several rotations of senior regulators on both sides to negotiate, could destabilize the cleared swaps market. Without equivalence agreements, CCPs in either jurisdiction could be subject to dramatically different requirements, which regulators have warned could result in the Balkanization of the global derivatives market.

“I have not wavered from my belief that cross-border deference provides an avenue for growth, resilience, and efficiency in our financial markets. I wonder if our EU counterparts could say the same,” Quintenz concluded. “Today the EC can state clearly its proposed legislation is not an abrogation of the 2016 equivalence agreement and we can move forward from this unfortunate episode.”

Additional reporting by Robert Mackenzie Smith.

Update: This story has been updated to include comment from the European Commission.