CFTC Commissioner Giancarlo Criticizes U.S. Regulators’ Refusal to Delay Swaps Margin Rules

CFTC Commissioner J. Christopher Giancarlo reprimanded U.S. prudential regulators and the CFTC for ordering swap dealers to meet a contested September 1 deadline for the implementation of certain margin requirements that are applicable to uncleared swaps.

In March 2015, IOSCO and the Basel Committee on Banking Supervision published a final policy framework establishing (i) standards for margin requirements for uncleared swaps, and (ii) a phased-in implementation period for the requirements with an initial implementation date of September 1, 2016. Last week, regulators in Australia, Hong Kong and Singapore announced that their implementation of the requirements would be delayed, which followed the pattern of a similar announcement by the European Commission several months before. Notwithstanding these announced delays, the CFTC and U.S. prudential regulators decided to proceed with the original implementation date.

Commissioner Giancarlo called that decision a “failure of U.S. trade negotiation,” and cited it as “yet another example of the failure of U.S. policymakers to negotiate harmonization in regulations . . . in a manner that does not place American markets at a competitive disadvantage.”

In his statement, Commissioner Giancarlo stated he was astonished at regulators’ “blindness to commercial reality,” and noted that American markets now will have a higher margin structure, which he emphasized will give a competitive advantage to major overseas derivatives markets. He also emphasized ramifications of the decision that could prove dangerous to the economy:

Even from a practical standpoint, the coming days will be enormously challenging for U.S. market participants as dealers are still working to finalize account documentation. Some observers warn of a liquidity crunch because certain dealers will not be ready to trade with other dealers. Unfortunately, U.S. regulators appear more concerned with sticking to an arbitrary deadline than the health of American markets and American market participants.

Commissioner Giancarlo warned that the United States will lose its negotiating leverage in the event of further delays.

Lofchie Comment: Kudos to Commissioner Giancarlo for prioritizing commercial realities. When Dodd-Frank first was adopted, certain U.S. regulators asserted that the rest of the world would follow their example whether or not the rules made any sense. That assertion has proved to be incorrect. In many cases, the Europeans have gone their own way (sometimes adopting more sensible rules, sometimes adopting rules that seem even less sensible), but they have not adhered to the strictures of U.S. regulators. Knowing now that the Europeans will follow their own path, U.S. regulators should not place U.S. firms at a material competitive disadvantage.

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