CFTC warns EU rules may force tighter US derivatives regulation

The US may be forced into tougher regulation on benchmarks as planned stringent European rules may shut out the region’s banks and asset managers from US markets, the head of the US derivatives regulator has warned.

Timothy Massad, chairman of the Commodity Futures Trading Commission, told US policy makers this week that there could be “adverse market consequences” from European Commission plans.

The European moves involve tougher oversight of benchmarks – a series of prices against which derivatives contracts worth several trillion dollars are pegged.

“Because of the potential consequences on financial markets, the CFTC also stands ready to work with its counterparts in the US financial regulatory sector to address this issue further,” he wrote.

His comments came in a letter dated November 19 to senior policy makers and seen by the Financial Times.

The warning comes as the US and Europe try to defuse tension over the post-financial crisis oversight of the global derivatives market.

Global policy makers have sought to tighten up systemic risk with tougher rules on trading and clearing derivatives while also cleaning up oversight of benchmarks after manipulation scandals.

The EU and US have been locked in – sometimes fractious – talks for months over European recognition of US rules on derivatives trading clearing as equivalent to European standards.

Banks have warned failure to agree standards could dramatically force up the costs of trading and fragment the market.

Europe wants to prohibit European-supervised entities like banks and asset managers from using benchmarks that are created by administrators located outside the EU.

Some benchmarks from the US or Asia have less stringent regimes, where benchmarks need not be authorised and supervisors lack binding power.

“As you know, the US does not have such a supervisory regime and in the absence of any changes, the third-country equivalency requirement would prohibit EU institutions from hedging using thousands of products traded on US futures exchanges and swap execution facilities,” Mr Massad wrote.

European-domiciled benchmark rates are widely used in CFTC-regulated products such as interest rate and commodity-related futures and swaps.

The failure to recognise the US has raised concerns that European institutions will be shut out of using US futures exchanges to hedge their risk.

Chicago-based CME Group’s eurodollar futures contract is widely used by traders to hedge their dollar swap interest rate exposures.

Mr Massad warned congressmen Michael Conaway, chairman of the House Agricultural Committee, and David Scott, who also sits on the Committee, of his concerns that the current EU benchmark reform proposals would require equivalent supervision of benchmark administrators by US authorities.

Industry bodies, including the European Banking Federation, the International Swaps and Derivatives Association, the Futures Industry Association and the Australian Financial Markets Association have warned the EU proposals risk creating confusion and uncertainty in global markets, with higher volatility and lower liquidity a likely outcome.

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