University of Houston finance professor Craig Pirrong posted on his blog commentary discussing the ongoing conflict between the United States and EU regarding derivatives regulatory policy, and the consequences of the United States and EU not accepting each others clearing rules as equivalent.
According to Mr. Pirrong, this issue is particularly pressing due to the upcoming December 2014 deadline for the EU to recognize U.S. central counterparty clearing houses (“CCPs”) as equivalent. Mr. Pirrong stated that if this does not happen, European banks that use a U.S. CCP will face a substantially increased capital charge on the cleared positions.
Mr. Pirrong further explained that this “game of chicken going on between the EU and U.S.” could lead to the world derivatives market becoming more fragmented, and therefore less competitive – an outcome that is “cruelly ironic,” according to Mr. Pirrong, given that previous CFTC Chairman Gary Gensler claimed his regulatory agenda would make the markets more competitive. Mr. Pirrong went on to note that EU Commissioner Michel Barnier’s recent statement approving the CCPs of five countries outside the EU, but not the United States, can be read as “a giant one finger salute from the EU to the CFTC.”
Mr. Pirrong concluded that the United States and EU are “fighting over control,” and the outcome will be a more fragmented, less competitive, and less robust financial system.
Lofchie Comment: In his usual impolitic style, Professor Pirrong makes the point that the CFTC’s drive for more global regulatory power is meeting the countervailing force of non-U.S. regulators who see no reason to defer to the CFTC. The CFTC would seem not likely to persuade the European financial regulators to concede, since it is hard to imagine their motive to concede authority over European firms to the CFTC. Accordingly, the CFTC has put itself in the position where it must either retreat (the rational thing to do) or do further damage to the U.S. economy by essentially conceding that the world is going divide up into economic zones, with the end result both a smaller world economy and one in which the role of U.S. financial institutions is confined to the U.S. zone.
More generally, certain of the U.S. regulators seemed to be of the view that they can increase the scope and demands of U.S. regulation without any reaction from either other regulators or market participants. That is demonstrably not the case. If U.S. regulators assert global regulatory jurisdiction, non-U.S. regulators are going to push back.
See: “What Gary Gensler, the Igor of Frankendodd, Hath Wrought,” Streetwise Professor.
Related news: EU Commissioner Barnier to Accept Clearing Rules from Five Countries outside EU, but Not the United States (July 1, 2014).