US watchdog threatens ‘strong and blunt’ retaliation over EU clearing rules

Washington — US banks and securities houses could be barred from trading on exchanges in the European Union if the bloc refuses to water down “irresponsible” proposals for regulating foreign clearing houses, a top US regulator said on Wednesday.

Christopher Giancarlo, chair of the US Commodity Futures Trading Commission (CFTC), gave his strongest warning yet on possible retaliatory measures if EU regulators insist on close supervision of US-based clearing houses under new rules.

"In my talks with European authorities, I have asked them to reconsider such an expansive approach," Giancarlo told a derivatives industry event in Chicago in a rare direct attack on another regulator.

The new rules, which the bloc aims to approve before Britain leaves the EU next March, would mean that “systemic” foreign clearing houses could only serve customers in the EU if European regulators can jointly supervise them.

Giancarlo said the CFTC will not allow the firms it regulates to comply with conflicting and overly burdensome regulation from abroad.

“If a satisfactory resolution of this situation cannot be found, the CFTC will have no choice but to consider a range of readily available steps to protect US markets and market participants,” Giancarlo said.

The CFTC has “strong and blunt” tools it can deploy unilaterally as a last resort without new legislation, including the withdrawal of the exemptions that allow US market participants to use trading platforms in the EU.

The watchdog has privately warned European officials that the bloc would suffer far more than the US in an all-out clearing war because US firms are much larger liquidity providers to European exchanges than vice versa, a person familiar with the discussions said.

The CFTC has so far received no indication from Brussels that it is willing to budge on its clearing proposal, despite the CFTC in recent weeks publicly pledging to move to a “deference” model of regulators accepting each other’s rules to avoid duplication, this person added.

Retaliatory action would be a last resort, this person said.

Target London

The proposed EU rules were prompted by Britain’s decision to leave the bloc next March, targeting a core activity that helps make the City of London a top global financial centre.

LCH, a unit of the London Stock Exchange, clears more than 90% of euro-denominated interest rate swaps contracts used by companies to insure themselves against unexpected moves in borrowing costs.

But US clearing houses like CME and ICE clear transactions for EU customers as well. Giancarlo said this would mean on-going EU surveillance and on-site inspections, with the bloc “dictating” board composition and corporate governance.

EU officials have said they want similar access to foreign clearing houses that the CFTC and the US Federal Reserve have with LCH’s dollar-denominated swaps clearing in London.

The CFTC has not given Brussels a deadline for responding but it does not expect  that there would be much opportunity for the bloc to make changes once the EU legislation is passed in March, the same person said.

Reuters