U.S. House Agriculture Subcommittee on Commodity Exchanges, Energy, and Credit considered testimony on international developments that would affect the U.S. derivatives markets. The witnesses addressed issues surrounding (i) Brexit, (ii) potential market fragmentation, and (iii) amendments to European Market Infrastructure Regulation (EMIR) that would introduce a dedicated regime for third-country central counterparties ("EMIR 2.2").
Terrence A. Duffy, Chair and CEO of CME Group Inc., said that imposition of certain of the EMIR 2.2 requirements, if applied to CME, could conflict with CME obligations under its existing U.S. requirements. He urged Congress and the CFTC to take advantage of the comment period for these rulemakings and advocate for amendments that respect U.S. sovereignty.
Christopher Edmonds, Senior Vice President of Financial Markets of the Intercontinental Exchange, empasized that (i) the industry "cannot afford regulatory confusion during a time of stress" and (ii) cross-border oversight and regulatory deference are crucial to "well-functioning markets."
Walter L. Lukken, President and CEO of FIA, expressed concern that non-U.S. regulators would impose direct authority over U.S. exchanges, clearinghouses and transactions. Mr. Lukken said that diverging from the current regulatory recognition and deference model could lead to market fragmentation. Concerns of market fragmentation were echoed by Daniel J. Maguire, CEO of LCH Group Limited, who warned that if fragmentation occurs due to EMIR 2.2, end users and customers for certain financial products will be affected.
Stephen Berger, Managing Director and Global Head of Government & Regulatory Policy at Citadel LLC (testifying on behalf of the Managed Fund Association), raised several regulatory challenges for the U.S. derivatives markets, including the potential impact of:
- EMIR 2.2;
- the Basel III leverage ratio;
- swaps market and liquidity fragmentation as highlighted by the CFTC Global Markets Advisory Committee;
- initial margin requirements for uncleared derivatives;
- the EU General Data Protection Regulation;
- insufficient data protection at regulators through the Protection of Source Code Act; and
- regulatory coordination in the United States between the SEC and the CFTC.
Commentary / Nihal Patel
U.S. responses to changes to EU clearing rules continue to escalate. CFTC Commissioners have repeatedly expressed concern and sometimes direct opposition to certain of the EU proposals. This has been going on for more than a year, and recently Commissioner Quintenz said: "It is my opinion that the CFTC's future relationship with ESMA and the European Commission will depend on a reasonable, predictable, transparent, and deference-based process under EMIR 2.2."
A recent report in the Financial Times suggested that the issue is continuing to escalate as a result of comments made by an EU regulator. Rep. Michael Conaway (R-TX), the Ranking Member of the House Ag Committee, viewed the potential changes in EMIR as "everything to do with retribution and competitive regulatory arbitrage." House Ag Committee Chairman Rep. David Scott (D-GA) said he "agreed 100%" with Mr. Conaway's comments.
All of this would seem to present a new challenge for the incoming CFTC Chair, notwithstanding the general strides made by current Chair J. Christopher Giancarlo in pushing greater deference and cooperation in cross-border regulatory matters.
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