US regulator warns on tough UK and EU derivatives battle

Outgoing CFTC head highlights challenges ahead for London traders and infrastructure

The UK’s looming departure from the European Union will pose a challenge for London’s derivatives trading and infrastructure, according to a key US market regulator.

Visiting London this week, Timothy Massad, the outgoing head of the US Commodity Futures Trading Commission, warned that the EU may force tough standards on the UK’s big clearing houses, derivative exchanges and traders to secure access to its markets once the terms of Brexit are set.

This covers companies that process and risk-manage billions of dollars in margin and collateral, such as LCH, the world’s largest interest rate swaps clearer, and ICE Futures Europe, which trades energy markets. London is one of the world’s largest hubs for the activity.

In contrast with the US, Europe has a tougher regime based on recognising other jurisdictions’ rules as “equivalent”. That status, on which UK-based businesses currently rely, has been thrown into uncertainty by the country’s decision last year to leave the EU. Without it European firms could also face higher charges for doing business in the UK. Furthermore, equivalence cannot be determined until the UK has left the EU — a situation many have called to cover with a transitional arrangement.

Speaking at an event hosted by the London School of Economics, Mr Massad expected talks between the UK and EU over markets oversight to be difficult. 

“When the CFTC was in negotiations with the EU over clearinghouse equivalence, I felt the EU applied tougher conditions than what were being applied to other countries . . . The London market is of course even more important to the EU, so it would not surprise me if the UK faced a similar situation,” he said.

Mr Massad, who leaves office next week, said Brexit would not challenge the strong derivatives trading and infrastructure ties that have flourished for decades between London and North America.

“I think it will be manageable. There is not anything in our rules that the UK has to have exited from the EU. The big market infrastructure providers, like LCH [the clearing house] are already registered with us,” he told the Financial Times. 

Mr Massad also downplayed the prospect that president-elect Donald Trump would repeal the Dodd-Frank act, the sweeping piece of legislation meant to contain the risk of another financial crisis. He said it would be a “major mistake” to dismantle the reforms.

“It’s very hard to say today what the world will look like. I’d be very surprised if it was repealed. That’s not to say that everyone agreed with every rule but the basic structure was supported,” he said.

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