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US to EU- the honeymoon is over

Although prefaced by the usual caveat that “the views contained in this speech are my own and do not represent the views of the CFTC”, Commissioner Brian Quintenz delivered the keynote address yesterday at the FIA Annual Meeting, eviscerating the EU’s plans to revise EMIR in respect of CCP oversight. The short speech is well-worth reading in full, but a few representative quotes will give a flavour of its forthrightness:

“Recently, the European Commission introduced legislation to revise the European Market Infrastructure Regulation—EMIR. That legislation aims to reassess the recognition status of all third-country CCPs and determine whether any clearinghouse is systemically important to the EU…In the proposed legislation, the European Commission is unilaterally abandoning the “recognition conditions” set forth in the 2016 equivalence agreement.

The CFTC sees this as a clear breach and violation of our agreement.”

“While Brexit presents significant challenges to the EU, it would be foolish for the EU to react by reneging on its agreement with the CFTC, the regulator of the world’s largest derivatives market. Yet that is exactly what the EU would be doing.”

“The EC’s proposal is unacceptable to the CFTC. It is unacceptable to the United States Treasury Department. It is unacceptable to senior United States Senators. And it is unacceptable to the White House, itself. The entire United States Government is steadfast in its opposition to the EC’s proposal.”

“To dis-incentivize the EU from reneging on its promises, they have recommended the CFTC seriously reconsider the existing accommodations it extends to EU firms, exchanges, and CCPs doing business in US markets. I agree with that recommendation and am prepared to go even farther.”

“The EU must realize that there is a limit to our patience with their unwillingness to stand behind a deal.”

“I now have serious questions about our counterpart’s trustworthiness as well as their priorities. Is the EU still committed to minimizing cross-border burdens, market fragmentation, and protectionism? Or, as it appears, is Europe intent on creating a closed, self-contained environment in which they can operate without the support or engagement of outside regulators and businesses.”

Discounting the possibility that Commissioner Quintenz has gone entirely rogue, it seems that the US’ rapidly metastasising trade war may soon have a Regulatory front. Commissioner Quintenz makes the point that the EU proposal is driven by currently, intra-EU Brexit considerations, US CCPs have made no changes to warrant the imposition of EU oversight. The point is well made and his views echo other recent criticisms from the US, but stakes have been raised from dialogue to invective and threat.

The EU proposal represents a fundamental overhaul of the EU’s approach to the recognition and supervision of third-country CCPs, effectively subjecting those which are “deemed to be systemically important or likely to become systemically important in the near future for the financial and economic stability of the EU” to direct supervision by ESMA. In the rush to regulate LCH, it seems the EU forgot to factor CME and ICE into the equation. The EU’s preoccupation with CCPs goes back to July 2011, when the ECB opined that exchanges handling euros should be legally incorporated in the euro area, the demand was quashed by the ECJ, but the concern has been revived and reinforced by Brexit. The EU’s position is entrenched and seemingly irrevocable, it lacks the mechanism to promise equivalence for UK CCPs on the first day after Brexit, and it is difficult to see how the EU can have a coherent policy that exempts the US. Equally, the US accusation that the proposal makes a mockery of the equivalence accord, seems entirely justified. If the consequences of material regulatory divergence weren’t so material, we would advise sitting back and passing the popcorn. However, they are extremely material; in the clichéd Chinese curse- times are getting more interesting.



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