CFTC-EC swaps accord not working, says MEP Swinburne

Trading platforms claim allowing US persons to trade on MTFs could subject non-US clients to US rules

Photo: PA Wire/Press Association Images

The new transatlantic swaps trading accord recently agreed by US and European regulators, aimed at preventing the fragmentation of liquidity in swaps markets, appears to be falling short of expectations, according to Kay Swinburne, a member of the European Parliament (MEP).

Speaking to Risk on the sidelines of the Futures Industry Association's annual meeting in Florida, Swinburne, who sits on the European Parliament's committee for economic and monetary affairs, stated her support for substituted compliance, but said anecdotal reports that European trading facilities might be refusing US persons access to their platforms – out of fear that liquidity pools could be contaminated, subjecting non-US participants to US rules – suggest the harmonization approach regulators have adopted so far is not working.

"If you really believed in substituted compliance, you should not have any risk of contaminating your platform [with a participant deemed a US person]. If you have true substituted compliance in place, then there cannot be the potential for contamination. If the regulators have agreed that they are going to trust each other on these exemptions, then they should act upon it in good faith," said Swinburne.

On February 12, the Commodity Futures Trading Commission (CFTC) and the European Commission (EC) unveiled a joint accord that laid out a process through which European multilateral trading facilities (MTFs) could allow US persons to trade on their platforms without having to register as a swap execution facility (Sef) with the US regulator.

Trading platforms have stated, however, that allowing US persons to trade on MTFs is unlikely to resolve the bifurcation of liquidity between US and non-US participants, and could serve to expose non-US clients to the full force of the CFTC swap trading requirements.

Separate pools have formed because US persons are required to clear certain products on Sefs, while non-US persons are not yet subject to equivalent rules. As a result, non-US persons may want to avoid trading with US persons.

Although Swinburne applauded the joint accord, she also emphasized that the true measure of successful harmonization is differing regimes with the same requirements.

"The rules made in one place might be different from those made elsewhere, but recently we saw the CFTC and the EC coming together and finally say their methods are not exactly the same but that they are coming to the same outcome. That's critical – the outcome is important, the process is not," she said.

This is a far cry from the early days of cross-border regulatory co-operation, as Swinburne confirmed widely reported stories that former CFTC head Gary Gensler poisoned his relationship with his European regulatory counterparts from the early days of his chairmanship by stating to EC officials his intent to establish the CFTC as a unilateral international swaps market regulator.

"Commissioner Gensler came to London and actually said he wanted to regulate global derivatives from the US. That was not a helpful stance to have. He said that early on [in his chairmanship], and he reiterated it on several visits to Brussels. It set up a certain amount of conflict very early on that then continued. I think a change of personnel at the CFTC will be helpful and I hope it will be more of a negotiation of equals going forward," Swinburne said.