Securities Regulation Daily U.S. CCPs will not be collateral damage in UK-EU battle, declare CFTC commissioners
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Thursday, March 15, 2018

U.S. CCPs will not be collateral damage in UK-EU battle, declare CFTC commissioners

By Brad Rosen, J.D.

In a rare public display of unity, Commissioners Rostin Behnam and Brian Quintenz expressed their deep concerns and issued stern warnings to the European Union that it not attempt to renegotiate the 2016 equivalence agreement reached between the CFTC and the EU in light of its ongoing battles with the UK over Brexit implementation. Commissioner Behnam’s remarks at the FIA annual meeting in Boca Raton, Florida, and Commissioner Quintenz’s speech delivered the following day, are in full support of Chairman Giancarlo’s position that any change to the commission’s existing 2016 agreement is unacceptable.

In written testimony before the Senate Agriculture Committee in February, the Chairman stated, "While we appreciate the E.U.’s need to address the ramifications of Brexit, the U.S. and its markets must not be its collateral damage." Both Commissioners Behnam and Quintenz embrace this sentiment.

The 2016 equivalence agreement. After three years of extensive negotiations, in February 2016, the CFTC and EC reached an equivalence agreement whereby the parties committed to a common approach to regulation and supervision of cross-border CCPs. The agreement is built on two central components. The first is the CFTC’s comparability determination for EU-domiciled clearinghouses registered with the CFTC. Those clearinghouses are deemed compliant with certain CFTC requirements if they satisfy corresponding European laws, lessening the regulatory burden on EU CCPs.

The second component of the agreement is the EC’s equivalence determination for U.S. clearinghouses registered with the CFTC, which serves as the basis for recognition by the European Securities Markets Authority (ESMA). Recognition is required for any foreign clearinghouse—a "third-country CCP"—to operate in the EU. Today, five CFTC-registered U.S. clearinghouses are recognized to provide clearing services directly to EU market participants. The agreement with the EC has led to increased regulatory coordination, greater efficiencies and heightened market resiliency.

Recent EMIR proposals. In the wake of Brexit last year, the EC proposed legislation to amend EMIR (the European Market Infrastructure Regulation). That legislation aims to reassess the recognition status of all third-country CCPs and determine whether any clearinghouse is systemically important to the EU. Such a designation would impose increased regulatory and supervisory burden, and any third-country CCP deemed systemically important would be required to adopt all of EMIR and accept enhanced oversight by ESMA. If a previously-recognized CFTC-registered U.S. clearinghouse is considered systemically important, it will be required to submit to additional EU law outside the terms of the 2016 equivalence determination.

As Commissioner Behnam observed, the EU’S proposal "would expand the regulatory and supervisory authority of ESMA over both EU and third-country CCPs, alter the framework for the recognition of third-country CCPs, and provide the European Central Bank (ECB) and other EU central banks with direct oversight authority over both EU and third-country CCPs." Benham added, "It would, in effect, make EU authorities primary supervisors of third-country CCPs."

Unacceptable adverse consequences. Behnam also asserted that "the EC’s proposed legislation would be detrimental to recognized U.S. CCPs. The proposal would likely subject recognized U.S. CCPs to overlapping regulation and duplicative supervision without due deference to existing CFTC regulation and supervision of those U.S. CCPs." He added, "This proposal would apply EMIR to all aspects of a third-country CCP’s business. This would be quite problematic for U.S. CCPs as there are aspects of EMIR that are inconsistent with the CFTC’s regulatory framework."

Behnam also noted that "If the proposed legislation becomes law, clearing costs through U.S. CCPs will increase for all market participants, and these increases potentially will de-incentivize central clearing, and could lead to downstream effects such as fractured liquidity and increased systemic risk, which would affect the stability of the financial markets."

The reaction. Commissioner Behnam asked that the EU provide the CFTC with assurances in its legislation that recognized U.S. CCPs will continue to be treated in accordance with the 2016 equivalence determination. However, Commissioner Quintenz asserted if the EU legislation is enacted, as currently proposed, the CFTC will see that as a clear breach and violation of its agreement. He stated, "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. The entire United States Government is steadfast in its opposition to the EC’s proposal."

Moreover, a violation of the 2016 agreement will have consequences according to Quintenz. First, Quintenz indicated he will vote against any additional EU equivalence determinations until the commission has specific assurances from European authorities they will honor their current commitments to the U.S. Second, the commissioner indicated he is now unwilling to support any effort by the CFTC to provide exemptive relief in response to recent requests from a number of European national market regulators seeking no action relief in connection with various CFTC requirements. The commissioner concluded, "The EU must realize that there is a limit to our patience with their unwillingness to stand behind a deal."

With the recent strident pronouncements from CFTC commissioners, the storm clouds of uncertainty continue to gather, while the potential unraveling of this important international financial arrangement is looming.

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