Tensions between US and European regulators over the cross-border application of derivatives market reforms were laid bare before a large industry audience this week, as US officials were accused of acting in their own national interests without consideration for other jurisdictions.
Speaking on a panel at the Futures Industry Association’s International Derivatives Expo (IDX) in London on Tuesday, a senior official at the US Commodity Futures Trading Commission (CFTC) suggested some clearing business should migrate back to the US to avoid the collateral segregation requirements of the European Market Infrastructure Regulation (EMIR), which do not match those of the Dodd-Frank Act.
“Our regulations require that all clearing intermediaries for contract market positions must be registered futures commission merchants, irrespective of the domicile or identity of the customer,” said Ananda Radhakrishnan, director of clearing and risk at the CFTC.
He identified LCH.Clearnet and ICE Clear Europe as two London-based clearing houses that need to address the dislocation in rules, as they clear for US-based Nodal Exchange and ICE Futures US respectively.
“The one way to resolve this conflict, which doesn’t require us or my colleagues at the European Securities and Markets Authority (ESMA) to provide an exemption, is for ICE Futures US and the Nodal Exchange to require that they be cleared by US-only derivatives clearing organizations (DCO),” said Radhakrishnan.
Ananda Radhakrishnan, director of clearing and risk at the CFTC
“If they move the clearing of these futures contracts, listed on contract markets, back to a US-only DCO, I believe this conflict does not arise.”
However, the suggestion sparked frustration among other regulators on the panel, with accusations that such a move would go against the spirit of the G20 commitment to ensuring mutual recognition and harmonized cross-border regulation.
“If we resolve these issues by having the business or the trading move from one jurisdiction to another – this dislocation would be from Europe to the US, but it could be the opposite in future – we would to a certain extent be failing the G20’s commitment to aligning the supervisory regime,” said Rodrigo Buenaventura, head of the markets division at ESMA.
David Lawton, director of markets at the UK’s Financial Conduct Authority, shared Buenaventura’s view, saying: “The long-term prize is how do we get to a point where we have mutually recognized regimes that are equivalent?
“In a narrow sense, one solution to this conflict of laws is that you have no cross-border activity – you just assume away the problem – but I don’t think that’s where the G20 are. It would be giving up at the first hurdle.”
While the disagreement centred on a single technical element of EMIR and the Dodd-Frank Act, the panellists accepted it had wider implications. Asked whether more national markets could emerge from the G20 reforms, Radhakrishnan said regulators will always be inclined to act in their own national interests.
“We can’t ignore the law,” he said. “I can see why you think they’re acting in national interests, but I’m not a global regulator. I’m a regulator who works for a US regulatory agency, and that’s my duty – to interpret the Commodity Exchange Act and our regulations as best I see.”