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By Richard Hill
CFTC Chairman J. Christopher Giancarlo isn’t expected to reach any new agreements during a 10-day trip to meet regulatory counterparts in Europe, but derivatives industry attorneys say an equivalence pact on swap execution rules might be in the offing.
Such an agreement ideally would allow market participants on both sides of the Atlantic to trade swaps on platforms in either the U.S. or Europe. A similar agreement on clearinghouse equivalency was agreed to in 2016 after several years of negotiation by Giancarlo’s two immediate predecessors.
Without an agreement on swaps execution, U.S. and EU swaps trading facilities—known as swap execution facilities in the U.S. and multilateral trading facilities in Europe—could become isolated from one another as soon as January, straining liquidity and making trading more expensive.
The EU is seeking to implement a trade execution mandate, possibly as part of a larger financial reform package set to take effect in January, that would restrict its traders from accessing platforms outside Europe when trading certain swaps. Until such a mandate passes, European traders can access U.S. SEFs; however, U.S. participants already are barred under CFTC rules from using European platforms to trade certain swaps.
Unlike his predecessors, Giancarlo has signaled his intention to rethink Dodd-Frank trade-execution rules. Such a new approach would put them more in line with European regulations and make an equivalence deal more likely. Specifically, the chairman has said he wants to move beyond mandating that trades take place through an order book or a request-for-quote system, as currently is required, and open up trading to other models, including auctions, volume match, and voice brokering.
“In my mind, that’s the single biggest sticking point,” Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, London, told Bloomberg BNA. “Europeans can trade on a SEF now. The challenge is, what happens when they can’t?” said Lalone, who specializes in in the regulation of financial products, financial markets, and derivatives. “If they can reach an agreement on that, a lot of the other stuff goes away or becomes a mopping-up exercise.”
Bloomberg BNA is an affiliate of Bloomberg L.P., which operates Bloomberg SEF.
Although January might be a soft deadline for an equivalence pact, that doesn’t mean the two sides must come to an agreement by that time. Discussions on clearing equivalence carried on for nearly five years.
CFTC spokesman Erica Elliott Richardson described Giancarlo’s current trip as a series of “relationship-building meetings,” and the agency didn’t respond to questions about specific agenda items.
Giancarlo has shown an inclination toward comity that could help in such negotiations. As a commissioner for more than two years and then as acting chairman, “you see him setting out a standard on policy but working with his fellow commissioners and other regulators,” said Micah Green, head of Steptoe & Johnson LLP’s cross disciplinary financial services practice in Washington. “And I think you’ll see him want to work with international regulators much the same way.”
Green also noted Giancarlo’s interest in negotiating with the Europeans. “This is the first non-August week he’s been chairman, and he’s spending it in Europe,” Green said. He predicted Giancarlo’s pragmatic, market-oriented approach to regulation “will be well received by European regulators.”
In a newspaper editorial in Paris’ Les Échos, Giancarlo said cross-border rules harmonization “is fully in the spirit of the historic agreement on financial market reform reached in 2009. In my judgment, increased application of deference is the path forward.”
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