US, European Regulators Clash Over CCP Rules

The Commodity Futures Trading Commission (CFTC) has accused the European Commission (EC) of attempting to renege on a previously agreed framework for cross-border CCP recognition, with the EC refuting this characterisation.

Speaking at the Futures Industry Association’s (FIA) annual conference in Boca Raton, Florida, Brian Quintenz, a commissioner at the CFTC, outlined details of this recent disagreement.

He reminded the audience that in 2016, regulators in the US and Europe agreed a “CCP equivalence determination”, which established a common approach to the regulation and supervision of cross-border CCPs.

This agreement essentially meant that the CFTC would deem EU-domiciled clearing houses registered with the commission as compliant with its requirements, as long as they adhered to the corresponding European laws. Likewise, on the other side, the European Securities Markets Authority (ESMA) agreed to recognise the CFTC’s CCP rules as equivalent to its own and allow US-domiciled clearinghouses to operate in the EU providing that they adhered to them.

However, the EC recently introduced legislation to revise the European Market Infrastructure Regulation (EMIR) that will require a reassessment of the recognition status of all third-country CCPs and determine whether any clearinghouse is systemically important to the EU.

In his speech, Quintenz claimed that any third-country CCP deemed systemically important will be required to adopt all of EMIR and accept enhanced oversight by ESMA and the oversight of the European Central Bank.

Therefore, according to Quintenz, if a previously recognised CFTC-registered US clearinghouse is considered systemically important, it will be required to submit to additional EU law outside the terms of the 2016 equivalence determination.

“In the proposed legislation, the European Commission is unilaterally abandoning the ‘recognition conditions’ set forth in the 2016 equivalence agreement. The CFTC sees this as a clear breach and violation of our agreement,” he added.

Quintenz was just getting started though.

He declared that it is “common knowledge” that the EC’s new CCP framework proposal is motivated by a desire to either maintain oversight of UK clearing houses or force them to relocate to within the EU after Britain leaves it.

Quintenz added: “Since 2016, no market developments have changed the risk US clearinghouses pose to the EU. The CFTC has made no material revision to its CCP regulatory or supervisory approach. The only change has been Brexit, a development irrelevant to the United States. The 2016 agreement is not predicated on the EU’s member-state composure. No justification exists for the EU to now renege on the 2016 agreement. We must not make a scarecrow of our accords.”

The commissioner then declared that the EC’s proposal is “unacceptable” to the CFTC, the US Treasury Department, senior US senators and the White House itself.

In short: “The entire United States Government is steadfast in its opposition to the EC’s proposal,” said Quintenz.

But wait, there’s more.

Quintenz warned that it would be “foolish” for the EU to renege on its 2016 agreement with the CFTC, “the regulator of the world’s largest derivatives market”, and that in response, the CFTC is seriously reconsidering the existing accommodations it extends to EU firms, exchanges, and CCPs doing business in US markets.

He also outlined a number of steps that he, personally, is willing to take in response to the EC’s recent proposal.

“First, in my capacity as a commissioner, I will vote against any additional EU equivalence determinations until we have specific assurance from European authorities they will honor their current commitments to the US. At this point, I see no reason for the CFTC to further pursue any cross-border harmonisation with the EU.

“Second, in recent weeks, a number of European national market regulators have approached the CFTC seeking no action relief from various CFTC rules and orders. I am now unwilling to support any effort by the CFTC to provide exemptive relief requested by EU authorities,” he said.

Quintenz added: “The EU must realise that there is a limit to our patience with their unwillingness to stand behind a deal.”

And yet, he still wasn’t done.

Quintenz explained that his strong feelings on this matter are a result of the “extraordinary and repeated efforts” he says that CFTC chairman, Christopher Giancarlo, made in order to explain the commission’s concerns to the European authorities. He said that these represented easy opportunities for the EU to reaffirm “the cooperation we all want and expect”, but that none has been forthcoming.

As a result of this, he stated: “I now have serious questions about our counterpart’s trustworthiness, as well as their priorities. Is the EU still committed to minimising cross-border burdens, market fragmentation and protectionism? Or, as it appears, is Europe intent on creating a closed, self-contained environment in which they can operate without the support or engagement of outside regulators and businesses. If it is indeed Europe’s intent, in response to recent events, to create a self-contained environment and close itself off, I say this: great, good luck, and guess what…I’ll help.”

Here’s how Quintenz chose to end his speech at FIA Boca: “I want a good, healthy, cooperative, productive and trustworthy relationship with the European Union. That is an outcome in which both the EU and US markets would thrive. But, it is not a condition upon which the success of US markets depends.

“Let me close by stating that 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.

“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.”

This was then the cue for the next panel to come on stage, which included Patrick Pearson, head of the financial market infrastructure unit at the EC, who immediately set about trying to refute some of the Quintenz’s comments.

Firstly, Pearson claimed that regulators in Europe started the process of reviewing ways to improve its financial regulation that ultimately spawned the new CCP framework proposal three years ago, before they even knew there was going to be a referendum on whether Britain should leave the EU.

He also categorically denied that the EC is trying to force UK firms to relocate to the continent post-Brexit.

“The word ‘location’ does not exist for us, it’s not in our proposal, it’s not in our minds, we’re not relocating entire firms to Europe,” said Pearson.

The new proposal, he maintained, was not about “extraterritoriality”, but “proportionality”.

“Do you know how much information our regulators get each year on the activities of the biggest clearing house on the planet? Six pages,” commented Pearson.

He continued: “So we then started asking ourselves: is that enough to know what’s going on in the European clearing space? And we started asking our clearing houses: what do you have to report in Japan or Hong Kong or Singapore or over here [the US] and I can tell you that the smallest clearing house in Europe each year reports to regulators, not six pages, not 60 pages, but 600 pages. That’s the smallest. So we started asking ourselves: how do we know what’s going on in Europe? How are these firms being supervised?”

Pearson emphasised that the EC proposal doesn’t plan to change anything for smaller CCPs that are not considered systemically important to the EU, but rather just seeks to acquire more information about those CCPs that could bring significant amounts of risk into the financial system there.

At which point, he turned to another speaker on the panel, Eric Pan, director of the Office of International Affairs, at the CFTC, and asked: “Would you be happy if your systemically important clearing houses gave you six pages a year? “


Pan responded that European CCPs do, in fact, file around 600 pages of regulatory filings, but that often these don’t go to ESMA, but instead to their actual supervisors and national competent authorities.

“We have to be careful here to address real problems as opposed to imaginary ones,” he warned.

Pearson followed up these comments by complaining about the lack of collaboration, cooperation and deference shown to European authorities by US counterparts.

Without naming the CFTC specifically, he said that there have been times where European regulators have asked other regulators for information and, rather than being collaborative, they have instead been “quite obstreperous” and in some cases denied them information about activity that is occurring in European markets.

Pearson also explained that part of the EC’s CCP proposal stems from a desire to get prudential regulators and central banks – which have different powers and skill sets compared to market regulators – collaborating with the EC on CCP oversight.

He commented: “Nothing wrong with that. But it takes some pretty mature regulators to actually stand up and say: “Yeah, I want to share with the prudential regulators and central banks…Be an adult, have a discussion and ask yourself: is there something that these people and institutions can bring to us to help us regulate better?”

Further, although Giancarlo and Quintenz both talked about the need for regulatory deference in their keynote speeches at FIA, Pearson argued that Europe has been shown a distinct lack of this by the CFTC in the past. For example, he pointed out that when Gary Gensler was chairman of the CFTC, European regulators offered almost 100% deference to the rules proposed by the US.

“Do you know what we got back in Europe? Not 100%, not 90%, not even 70%, not 60%, not even 50%. We got back 45% deference from the United States CFTC,” said Pearson.

Amongst what was a fairly contentious session at the conference, Pearson did offer one glimmer of hope for the future of cross-border CCP regulation, namely that much of the current disagreements could stem from misunderstandings about the EC’s proposed legislation.

He said that he has seen or heard of comments from people in the US about how the legislation would authorise European regulators to fly to the US unannounced and inspect US firms to demand that they comply with EU rules, but that is simply not true.

“We look at our rules and we don’t see anything like that in there. We are interested to see how other regulators read our rules, maybe there is a lot that’s getting lost in translation and that’s really important. We don’t want confrontation, we don’t want polarisation. We want collaboration, that’s what makes regulations work,” said Pearson.

Galen Stops

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