The Committee on Capital Markets Regulation today issued a letter to derivatives regulators comparing proposed E.U. swaps clearinghouse requirements against their U.S. counterparts under Dodd-Frank.

Addressed to Rodrigo Buenaventura, Head of the Markets Division of the European Securities and Markets Authority (“ESMA”), Gary Gensler, Chairman of the U.S. Commodity Futures Trading Commission (“CFTC”), and Patrick Pearson, Head of the Financial Markets Infrastructure Unit of the European Commission, the letter recommends that regulatory authorities cooperate to resolve differences between their regulatory regimes to avoid inefficient fragmentation of the cross-border swaps market.

Committee staff compared the proposed regulation of the E.U. “over-the-counter” derivatives market via the European Market Infrastructure Regulation (“EMIR”) and the ESMA final technical standards against the U.S. regulatory regime as set forth in Title VII of Dodd-Frank and certain CFTC rules thereunder. The comparison revealed significant differences between the clearinghouse requirements of the two jurisdictions.

CFTC proposed guidance requires cross-border swaps between U.S. and foreign persons to be cleared by a CFTC-recognized clearinghouse, whereas EMIR would require swaps between E.U. and foreign persons to be cleared by an ESMA-recognized clearinghouse. Such jurisdictional overlap subjects market participants to a variety of divergent regulatory standards, including, for example, with respect to minimum margin requirements. If left unresolved, such conflicts will necessitate parallel and duplicative clearinghouse systems, reducing netting opportunities for each class of swap and resulting in unnecessarily burdensome collateral requirements.

The letter considers two possible solutions—“dual registration,” whereby clearinghouses handling cross-border swaps would register in both jurisdictions simultaneously, and “foreign recognition,” under which the CFTC and European Commission would each exercise authority to grant recognition of certain foreign clearinghouses subject to comparable regulation—ultimately concluding that a foreign recognition-based approach offers several advantages. The Committee also suggests that the CFTC extend its temporary exemption of foreign branches of U.S. banks from the definition of “U.S. person” until such time as issues of jurisdictional overlap have been conclusively resolved.

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The Committee on Capital Markets Regulation is an independent and nonpartisan 501(c)(3) research organization dedicated to improving the regulation of U.S. capital markets. The Committee’s Director is Hal S. Scott, Nomura Professor and Director of the Program on International Financial Systems at Harvard Law School.

For further information:

Hal S. Scott
Director
Committee on Capital Markets Regulation
hscott@law.harvard.edu
617.384.5364

 

A PDF of the letter may be viewed here.