CFTC Chairman J. Christopher Giancarlo said that the most important aspect to the CFTC of the European Union’s proposed amendment of its recognition framework under the European Market Infrastructure Regulation (EMIR) is whether the EU will want to exercise direct oversight over third-country central counterparties (CCPs), including those in the U.S. In his view, the current equivalence agreement between the CFTC and European regulators works, and the CFTC is not inclined to reopen it.
In remarks to the Eurofi Financial Forum in Estonia, Giancarlo said he understands European authorities’ need to appropriately supervise CCPs to ensure that their activities do not import unacceptable systemic risk into Europe. However, the CFTC has a similar responsibility, he said.
Hard-won agreement. He noted that the CFTC and European authorities spent three years discussing CCP supervision and arrived at a hard-negotiated equivalence agreement. The fundamental elements of the agreement are the EC’s equivalence determination for U.S. clearinghouses registered with the CFTC, which in turn served as the basis for recognition under EMIR, and the CFTC’s issuance of a substituted compliance regime for EU-based clearinghouses registered with the CFTC or seeking registration.
Both sides made concessions, he said, and reached a successful outcome that involves a principles-based approach to CCP oversight. The current equivalence agreement is the right approach, he added, and ensures that swaps CCPs remain financially sound while fostering cross-border trade flow and risk mitigation.
Giancarlo pointed out that the CFTC has regulated and supervised derivatives CCPs for more than 40 years. It currently oversees 16 registered CCPs, many with global businesses. No CCP subject to CFTC oversight has ever failed to meet a financial obligation to one of its clearing members, he noted.
Supervisory framework. In Giancarlo’s opinion, every CCP should be subject to a comprehensive supervisory framework in its home jurisdiction that ensures an appropriate amount of oversight. That framework should include extensive risk surveillance, he said, with daily monitoring of risk exposures by all registered CCPs. This requires CCPs to be subject to data reporting requirements on a daily, quarterly, annual and even event-specific basis, he added.
The supervisory framework also should include annual examinations that include in-depth analyses of rules and procedures, and staff discussions on the application of CCP rules and procedures, he said. In addition, there should be an advance review of proposed rule amendments or new rules that will have a material impact on a registered CCP’s business. Giancarlo noted that this is the approach the CFTC takes, and it enables the agency to monitor risk by entity and across markets providing an appropriate level of oversight for each registered CCP.
Home country authority. Giancarlo said that the CFTC views regulatory deference as giving a home country authority primary oversight over its domestic CCPs once the regulator has implemented a comprehensive supervisory framework. Foreign regulators should defer to the home country’s authority under this plan, he added. In his view, the deference should be underpinned by a robust, outcomes-based comparability assessment of the consistency of the home regulator’s relevant regulations and supervisory programs.
He said that as CFTC chairman, it is his intention to have the CFTC make more explicit in its cross-border rules that the CFTC will defer to the rules of comparable foreign jurisdictions. That will bring the agency back to its traditional approach to cross-border regulation and accord with the spirit of the Dodd-Frank Act, he noted.
The challenge of the supervision of large cross-border CCPs will test whether U.S. and European authorities are serious about regulatory coordination, according to Giancarlo. Without that coordination, overlapping regulatory burdens, inconsistencies, and legal uncertainty may threaten market stability, and could reverse the progress global regulators have made since the 2008 financial crisis, he concluded.
RegulatoryActivity: CFTCNews CommodityFutures Swaps Derivatives InternationalNews DoddFrankAct
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