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EU-US financial regulation- another celebrity marriage hits the rocks

The FT reports that the EU is threatening to effectively derail the Transatlantic Trade and Investment Partnership (TTIP) talks, unless the US includes coordination of financial regulation as part of the package. Leaked documents confirm that the EU intends to up the ante by excluding discussion on all financial services, a move that would significantly weaken the outcome of the free trade partnership. The US trade representative, Michael Froman, commented that there are already multiple fora in which regulatory cooperation is being discussed, “The Europeans have yet to show us what they would like to see improved about these forums…That said, we have made clear that we are not open to creating any process designed to reopen, weaken, or undermine implementation of  Dodd-Frank.” The split coincides with Michel Barnier’s Washington trip, to plead the case for transatlantic regulatory harmony. In a speech optimistically-titled “The EU and US: leading partners in financial reform”, he concluded “It would be nothing short of a disaster if our agreements on broad principles are undermined by the detailed rules and their implementation being just too different… Informal dialogues between administrations are useful… But a dialogue is not true regulatory cooperation …We ended up discussing important developments in an ad-hoc way, in informal and opaque settings. And now we are struggling to implement the agreements reached late in the night.”

Risk magazine reports a timely example of such difference- the EC is unlikely to approve the US as CCP-equivalent in its first wave of authorisations.  As a prerequisite to QCCP status, the CCP’s home country must be assessed as equivalent. Failure to do so by 15 December 2014 will impose a vastly heavier risk-weighting on all the CCP’s trades with EU banks. A spokesperson said equivalence would be granted for: Australia, Hong Kong, India, Japan and Singapore , because “The first five countries happened to be most advanced in having all of the relevant rules in place”. Referring to the December deadline, Chief Executive of CME Clearing, Kim Taylor, last month opined that the EU had “taken hostage all of the exchanges and clearing houses that do not operate on their soil, and said that as of a certain time those hostages will be shot.” With no guidance as to when US equivalence may be authorised, there is speculation that the EC’s ransom demand is that the CFTC make significant changes to their rules for foreign CCPs, which prevent “exempt” DCOs from transacting with US clients. It is likely that the rule will contravene the EC equivalence requirement that the non-EU country must install “an effective equivalent system” recognising European CCPs.

Although the much-heralded “Path Forward” was always a marriage certificate signed in pencil rather than blood; the honeymoon is over as various officials, and semi-official “leaks”, make the mutual frustration glaringly evident. While officials on both sides pay unceasing tribute to regulatory harmony, they seem more statements of ideal intent than fact. US financial regulation is mired in internecine inter-agency conflict, while the EU seems determined to prove it is more Alsatian than lapdog. If the last six years of reform are going to do anything more than usher in the golden age of regulatory arbitrage, the world’s two largest trading partners need urgent relationship counselling.

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