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Last updated: February 12, 2014 7:15 pm
US and European regulators have reached an agreement over the policing of the $700tn over-the-counter derivatives market – bowing to banks’ concerns that their conflicting rules could fragment global trading and push up costs.
Under a deal agreed on Wednesday, European-approved platforms that trade derivatives will now be exempt from US trading rules until equivalent European rules come into force in around three years’ time. US banks trading on these venues will also be exempt.
Officials hope that the deal will avert a spat between the two trading blocs that market participants had warned could split the financial markets, by making dealers chose between differing trading jurisdictions.
The deal – which has been agreed by the European Commission and the Commodity Futures Trading Commission, the US derivatives regulator, comes as both bodies prepare to tighten up oversight of the vast but opaque off-exchange market, which was blamed form amplifying the financial crisis in 2008.
Tensions over the impact of US and European legislation emerged publicly last year – in spite of a much-heralded agreement to jointly oversee the transatlantic derivatives market in July, known as the Common Path Forward.
Last December, a ruling by the CFTC effectively meant that foreign companies, including those in Europe, had to use CFTC rules for most aspects of clearing, trading and data reporting.
However, the departure in early January of Gary Gensler – the CFTC chairman who was a key driver behind the US regulator’s aggressive stance – has been followed by a more conciliatory approach from the CFTC. In recent weeks, acting chairman Mark Wetjen has met several top-level European counterparts to discuss ways regulators could better work together.
At the same time, Europe has made progress by finalising a political agreement for Mifid, its flagship markets legislation. Under Wednesday’s agreement, EU trading platforms will be exempt from CFTC rules until Mifid comes into force, probably at the end of 2016.
March 2013 : The regulatory drive for more over-the-counter derivatives to be electronically traded requires new platforms, and new language to cope with the demands. Kevin Houstoun, co-chair of the Fix Protocol Global Technical Committee and chairman of Rapid Addition, explains the difficulties of translating rules into reality to Philip Stafford, editor of FT Trading Room
“As G20 commitments move from words to action, regulators can and should work together to ensure that their respective rules interact with each other in the most effective and efficient fashion,” said Michel Barnier, European commissioner for financial services.
“This needs to be done without creating regulatory overlaps or loopholes this creating a global level playing field for operators. Today is an important step but far from the final one on the road towards global convergence,” he said.
The agreement comes as both sides introduce the latest stages of the G20 agreement. Next week, the US will begin mandatory trading of swaps on transparent trading venues.
Europe is further behind in the reform process but on Wednesday began requiring all banks, corporations and investors trading in Europe to report more details of their derivatives trades to authorities.
“As the CFTC moves forward with the swap trading mandate in the United States, it must and will continue to work with its counterparts in Europe and elsewhere to meet the G20 commitments and ensure that standardised trading on regulated platforms protects global liquidity formation and provides much-needed pre-trade transparency to market participants,” said Mr Wetjen.
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