Q&A: CFTC’s Giancarlo on the race to overhaul cross-border rules

New Sef rules imminent, but deference to foreign regulators may not be completed by 2020

Christopher Giancarlo

When Christopher Giancarlo announced plans in early September to overhaul how the US Commodity Futures Trading Commission will treat foreign clearing houses, he literally moved markets. But now he tells Risk.net that his far-reaching proposals in this area might not be completed during his time as chairman. His current term expires in April 2019, though he is widely expected to lead the CFTC through 2020.

And that’s just one part of an ambitious agenda for reforming swaps trading, harmonising global regulations and simplifying domestic ones. Turning that agenda into tangible rule proposals has not been easy. Hamstrung by budget cuts, and lacking a full slate of commissioners, Giancarlo has had to settle for only modest reforms – but not for much longer. 

On August 28, the US Senate confirmed Dawn Stump and Dan Berkowitz to join the CFTC, giving it a full quorum for the first time in five years. In the meantime, Giancarlo has been planning reform of the rules governing swap execution facilities (Sefs) ever since he prepared a white paper in January 2015, during Timothy Massad’s chairmanship.

Giancarlo’s white paper, and a subsequent draft published in April this year, advocated a number of major changes, including replacing the made-available-to-trade designation by Sefs themselves with a regulatory trading mandate, and allowing voice trading on Sef. Giancarlo now says the agency will issue new swap trading rules “in a matter of weeks.”

Another major legacy question is on commodity position limits, designed to avoid any firm establishing a controlling share of the total market. The EU already introduced position limits at the start of 2018, and in response, Ice moved a number of oil and natural gas futures contracts from its European to its US trading platform to avoid the European regulation.

Despite his misgivings about the original CFTC draft, a final proposal on position limits will be unveiled “in less than six months”, says Giancarlo.

Approving a comparability determination for the UK is another priority. It took three years for the CFTC and European Union to recognise each other’s rules on clearing houses, non-cleared margin and trading venues as equivalent. Giancarlo wants a similar determination with the UK approved before March 29, when the country is set to leave the EU

Overhauling the CFTC’s cross-border rules will take longer, however. Earlier this week, Giancarlo released a white paper setting out his vision for a more flexible cross-border regulatory framework based on deference to foreign jurisdictions with comparable rules. He estimates 95% of swaps trading takes place in jurisdictions that have adopted reforms in line with the G20 Pittsburgh commitments.

Giancarlo says trading venues and central counterparties in comparable jurisdictions should be allowed to do business with US customers without having to register with the CFTC. Specifically, the white paper recommends that foreign CCPs in comparable jurisdictions should be permitted to clear trades for US customers indirectly through non-US clearing members.

Giancarlo also confirms US clearing firms could be allowed to provide client access to foreign CCPs through a correspondent clearing model, where the US clearing provider opens a correspondent account with a non-US clearing member. The Futures Industry Association and the Securities Industry and Financial Markets Association advocated such an approach in a joint paper published in December 2017.

The October white paper is your third since joining the CFTC. When can we expect to see some hard rule proposals?  

Christopher Giancarlo: The Sef proposal, the subject of my first white paper, will be before the commission in a matter of weeks.

What about on cross-border regulation?  

CG: I want to take some soundings on this. It’s a complicated area and it’s going to require a lot more input. It will be several quarters before we can turn this into a rule proposal. It’s a sea-change in approach, and it’s going to have an impact globally, so we’re really going to think it through. I think it’s a better approach than the road we’re on now.

[The white paper] is almost a concept release, an opportunity to paint a picture, a different view, and gather input before turning that into an actual rule proposal, which would be much more specific.

We want not just industry feedback, but political and regulatory [feedback], because it affects regulation around the world. The core of it is deference to overseas regulation, so we want to get feedback from fellow regulators as well as market participants.

[On Sefs,] I expect to be putting out a multi-hundred page proposal very shortly.

Can you get all this done before you leave the commission?

CG: Yes. We will get the Sef rules done before I leave the commission. The cross-border may take some more time. 

Could it be completed after you’ve left?

CG: The cross-border, potentially.

And what about the position limits rule?

CG: I expect to put a position limits proposal in front of the commission in less than six months.

We were expecting to see that before the end of the year. Are the Sef and cross-border rules more of a priority?

Chris Giancarlo - CFTC

CG: No. The Sef rules have been clear in my mind for a long time. Position limits – the prior administration didn’t get them over the finish line, and I now have the opportunity to address some of the concerns I raised previously. My focus on position limits is to make sure the limits we adopt allow hedging practices that have existed on the American farm for generations to continue, and to allow hedging practices that are used by manufacturers also to be utilised.

Even though I voted for the prior rule proposals in order to garner reaction, [it] was far too restrictive for the way people actually hedge real production risk. I’m determined to get it right with the position limits I put in front of this commission.

Let’s drill into the detail of the cross-border paper. You want to give US end-users access to foreign CCPs that are not registered with the CFTC as DCOs. The white paper says US customers will be allowed to clear through non-US clearing members at foreign CCPs. Will you also allow US customers to access foreign CCPs through a US FCM, under a correspondent clearing model?

CG: We’re proposing that. We want to open that up as well.

What are the political implications of easing cross-border rules if, say, JP Morgan’s UK business fails?

CG: I understand that. I can think of a lot of scenarios. We still have to get to a system that works on a global basis. If we’re not going to extend deference to our overseas partners, then they’re not going to extend deference to us. And what kind of world is that?

On things that have to do with systemic risk, what we’re proposing is what’s called a stricter level of comparability. So you can’t have different capital levels or margin levels for European banks and American banks.

With things that are not about systemic risk, but about market practices – whether you have to report a swap in 30 seconds or 45 seconds – that’s not a source of systemic risk and we should give deference to other countries’ approach to that. Every market is different. There may be a different need for those different standards. And so, why wouldn’t we grant a broader range of deference for things that don’t have to do with systemic risk?

Could greater deference result in some firms moving their business to other jurisdictions, outside the US?

CG: I’ve spent a lot of time in markets. Markets rarely move because of rules. They normally look for capital, liquidity, best pricing – those things are far more important to market participants. We have deep liquid markets, and as long as we maintain that, the business that needs to be done here will be done here. [For yen swaps], the deepest, liquid market will be in Japan and business will go there. You won’t find people coming to New York to do a yen swap because our rules are better than theirs. They’re going to go where the liquidity is.

Which jurisdictions have not adopted G20 reforms to their swaps rules, and so will not benefit from deference?

CG: They’re challenging. We estimate only 5% of global swaps trades take place in jurisdictions that haven’t adopted the reforms.

Who are we talking about?

CG: Futures trade in a lot of developing countries […] Russia, India, Brazil. But swaps only trade in the most developed nations – Britain, US – [and] they have all adopted the core reforms. I don’t want to downplay non-reform-adopting jurisdictions, but they’re not core to this exercise right now. They do present challenges and one of our principles is we’d like to encourage them to adopt the reforms.

You have previously spoken about the need for equivalence determinations with the UK post-Brexit. What needs to be done to grant equivalence, and what is the deadline?

CG: The day Brexit happens, we no longer have equivalence with the UK. We have equivalence with Europe. When we reached equivalence with Europe, Britain was part of the EU. The moment Brexit happens – poof! – equivalence with Britain is gone.

So we need to get to the point where we can grant equivalence to Britain. Now, it should be easy because we’ve already agreed equivalence with Europe, and Britain is going to adopt all the same European laws, so it should be pretty simple. But there’s a process, and we still have to do the process.

Do you need any further assurances that the UK is going to keep the same ruleset as the EU?

CG: That’s what Britain has said, but they have to confirm that to us. We need their application. We are underway, we just need the attention, the bandwidth, the focus to make it happen.

There’s an equivalence process – the same process we went through with the EU.

How long will that take? Is it going to get fast-tracked?

CG: With the EU it took three years. I hope we have it done before March.

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