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When the European Commission and the US Commodity Futures Trading Commission (CFTC) unveiled their July 11 agreement on cross-border regulation of over-the-counter derivatives – A path forward – it seemed precisely what the market needed. After a year of increasingly tense wrangling about regulatory boundaries, a path was undoubtedly a good thing. And forward seemed the right direction. While it might be pleasant in other contexts to take a path to one side or the other – and while going backwards is a necessary evil in certain situations – everyone wants to go forwards when it comes to derivatives regulation.
But the document has turned out to be poorly named. Since the agreement, coordinated regulation of the inherently cross-border derivatives market has seemed more remote than ever. First, there was the slow-dawning horror of the infamous footnote 88 in the CFTC’s final rules on swap execution facilities, which extended the regime to a host of platforms that had believed they would not need to register – and endangered the liquidity of some venues operating outside the US.
The CFTC has some rules in place. Europe’s problem is that timelines have been steadily slipping. In August, the European Securities and Markets Authority (ESMA) told the European Commission it had not realised how hard it would be to say which of the various parties involved in a listed derivatives trade should report it. ESMA requested a year’s delay, which the commission rebuffed. In September, ESMA also pushed back the start of OTC derivatives reporting, this time blaming would-be repositories for failing to complete their applications correctly.
Now, industry sources say Europe’s OTC clearing regime is unlikely to take effect in the middle of next year, as has long been the plan.
These delays are not just a European problem. The CFTC’s approach to cross-border regulation is based on the concept of substituted compliance, meaning overseas entities that are within the scope of the agency’s rules can comply with local regulations instead – as long as the CFTC deems them equivalent to its own. At the moment, that test is impossible in Europe, and the likely outcome is that existing CFTC exemptions will expire, leaving many European firms to comply with US rules.