LONDON (Reuters) – Foreign clearing houses for derivatives face tougher scrutiny for risks they would pose to the United States economy if they collapsed, a senior regulator said on Tuesday, mirroring recently-approved European Union reforms.
The EU has just approved a law requiring its regulators to categorize foreign clearing houses according to risks posed to the EU financial stability if they went bust.
Commodity Futures Trading Commission (CFTC) commissioner Brian Quintenz said the proposal was not a tit-for-tat to the EU reform, which prompted U.S. accusations of regulatory overreach.
“It’s setting within a policy framework what we already do on an operational basis,” Quintenz told Reuters on the sidelines of a conference in London.
The CFTC currently grants exemptions to smaller foreign clearing houses from onerous U.S. rules on the basis they are being properly supervised by their home regulator. Larger clearers must register with the CFTC.
“This is an effort to put that in a regulatory framework,” Quintenz said.
The new framework would define what posing a “substantial risk to the United States” means in practical terms, such as by measuring how much of a clearer’s activity can be traced back to a U.S. entity, Quintenz said.
“My expectation is that it won’t change the impact on any registered entity,” he added.
But clearing houses that currently operate under an exemption may want to be registered under the new framework to get a CFTC “stamp” to reassure clients, Quintenz said.
In the EU, systemically important clearers must undergo close scrutiny by the European Securities and Markets Authority (ESMA) in their home country if they want to serve customers in the bloc.
It was prompted by the prospect London-based LCH, Europe’s biggest clearing house, being outside the bloc and EU supervision after Brexit.
LCH clears the bulk of interest rate swaps traded in the EU.
“It’s good to have a formal structure out there in public as a contrast to what we may or may not see out of the European Union,” Quintenz said.
CFTC Chairman Christopher Giancarlo had urged the Europe to defer to the home supervisor of a foreign clearing house, but the EU went ahead with approving its reform,
ESMA Chair Steven Maijoor told the conference that the EU and U.S. approaches shared the same thinking.
Maijoor said powers over foreign clearing houses were needed as Brexit raised concerns of regulatory “arbitrage”, whereby firms seek to exploit differences between jurisdictions.
Even if rules are close to one another, there is still the risk of regulatory competition, Maijoor said.
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