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US derivatives regulator warns EU over clearing plans

The top US derivatives regulator has issued a stark warning to the European Union against changes to the way it oversees foreign clearing houses, warning that a unilateral move by the bloc would be “a violation of trust and co-operation.”

Chris Giancarlo, chair of the Commodity Futures Trading Commission, on Tuesday urged policymakers in Brussels not to force clearing of euro-denominated derivatives into the EU without prior discussion with the US. The two jurisdictions collectively represent the bulk of the world’s derivatives trading.

He said any independent move by Europe would break a hard-won agreement between it and the US over recognition of each other’s clearing rules in 2016, which took more than three years to conclude.

The EU’s oversight of systemically critical clearing houses, which stands between a deal and manages the risk to the market when one side defaults, has become a flashpoint since the UK voted to leave the European Union last year.

Most euro-denominated clearing takes places in London, and the European Commission is taking feedback on its plans to increase its powers to supervise clearing houses based outside the bloc, and if necessary, to introduce a “location policy” to force them to shift activities.

Speaking at a conference in Switzerland, Mr Giancarlo acknowledged that “Brexit raises new and challenging issues for how Europe regulates its financial markets.”

“Nevertheless…. I would consider any unilateral change by EU authorities to the CFTC-EC Equivalence Agreement to be a violation of trust and cooperation between the US and Europe.”

He said any changes should be developed in co-operation with the CFTC. “If the EU must reconsider its approach to cross-border supervision of systemically important clearing houses, then we cannot have piecemeal and contradictory rulemaking,” he added.

US regulatory officials, exchanges and banks have been steadfast in opposing any plans to relocate euro-denominated clearing, even if the US potentially stood to benefit from London business being diverted to America. They have all warned that such a policy would make trading euro-denominated instruments more difficult and expensive.

Mr Giancarlo added that he “soon” expected to reach a similar deal on the EU recognising the US’s swaps trading rules as “equivalent” with the incoming Mifid II rules. However, he confirmed that he intended to press on with reforms to the US’s swap trading rules which he dubbed “CFTC Swaps Reform Version 2.0”.

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