CFTC and European Commission Reach Deal on Cross-Border Derivatives

The Commodity Futures Trading Commission (CFTC) and European Commission (EC) have reached a landmark deal on regulating cross-border derivatives trading. The deal distributes responsibilities between US and European regulators in order to prevent the disruption of global markets.

The deal would allow European regulators to monitor the actions of international branches and subsidiaries of American companies and their derivatives deals that occur in the 28 countries of the European Union. The CFTC would defer regulatory monitoring of international derivatives to European agencies in cases where the rules are similar to those in the United States.

“The CFTC and the European Commission share the view that jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes,” the regulators said in a joint statement.

As the market subject to these guidelines is international, it is understood by regulators that the simultaneous application of each other’s regulations could lead to conflicts of law, inconsistencies, and legal uncertainty. The CFTC and EC have worked collaboratively in order to deal with this complicated political difficulty of synchronizing how principles are translated into law, with legislation such as Dodd-Frank in the US and Emir in the EU.

For bilateral uncleared swaps, and because EU and US rules for risk mitigation are essentially identical, the CFTC plans to issue no-action relief for certain transaction-based requirements. In this regard, the EU’s system of ‘equivalence’ can be applied to allow market participants to determine their own choice of rules.

The deal shows that Washington has trust in European regulators to enforce financial rules designed to protect US taxpayers.

CFTC Chairman Gary Gensler said, “With these joint understandings, together, we’ve taken another significant step in our mutual journey to bring transparency and lower risk to the swaps market worldwide.”

The US and EU look to invite other countries to join this approach to make sure that the G20 commitments will be applied in a sensible and rigorous way to cross-border derivatives trades.