CFTC Chair J. Christopher Giancarlo reviewed the implementation of swap reforms over the past eight years and advocated for increased cross-border regulatory deference. In an op-ed published by French newspaper Les Échos, Mr. Giancarlo said that many of the reforms in the derivatives markets undertaken after the 2008 financial crisis have been implemented successfully, but added that cross-border supervision is an area in need of regulatory attention in light of the increased globalization of markets.
Mr. Giancarlo focused on the regulation of central clearing. He said that "diverging regulatory views" on the effective supervision of global central counterparty clearinghouses ("CCPs") can cause "regulatory redundancies" and "legal uncertainty." He expressed concern that these unwelcome effects may lead to increased costs and discourage market participants from centrally clearing trades. He advocated for cross-border deference as the most effective regulatory strategy for futures and swaps regulation. The CFTC, Mr. Giancarlo stated, "has a long history of regulatory deference to overseas regulatory counterparts in the futures and swaps markets." He noted that this approach gives foreign firms access to U.S. customers. In addition, Mr. Giancarlo described how regulatory cooperation between jurisdictions allows parties to operate in accordance with the rules of their home jurisdictions. This contributes to the resiliency of global markets and, with proper coordination, ensures that CCPs operating across multiple jurisdictions are "held to the same high standards." Mr. Giancarlo detailed the various benefits of deference arrangements, but explained that the CFTC wants to build stronger relationships with regulators from other jurisdictions and will continue to develop the deference-based framework. He also said that certain circumstances call for an alternative approach, such as when a CCP is systemically important in multiple jurisdictions.
In addition to focusing on clearing, Mr. Giancarlo noted, CFTC staff members are in the process of considering ways in which the Commission can incorporate deference into "other parts" of its regulatory framework.
Commentary / Steven Lofchie
Under former CFTC Chair Gary Gensler, the CFTC essentially tried to bully the rest of the world into adopting the same rules that the United States had adopted under Dodd-Frank. This simply resulted in the rest of the world pushing back. See, e.g., Joint Cautionary Letter from the EU, France, Japan and the UK to the CFTC on U.S. Cross-Border Swaps Regulation (with Lofchie Comment), European Commissioner Barnier on U.S.-EU Cooperation [or the Lack Thereof] (with Lofchie Comment). The CFTC eventually conceded that this was not a workable strategy. The CFTC and the European Commission on Common "Path Forward" for Regulating Derivatives (with Lofchie Comment).
Chair Giancarlo has to figure out a workable strategy that affirms both U.S. regulatory interests and U.S. economic interests. U.S. financial intermediaries have a very strong interest in the results of this strategy. Too loose, and it puts U.S. firms at a competitive disadvantage in competing for business. Too restrictive, and no one wants to trade with U.S. firms.
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