LONDON, Sept 4 (Reuters) - How the United States supervises cross-border derivatives is flawed and needs resetting to avoid fragmenting markets and placing undue burden on companies, a top U.S. regulator said on Tuesday.
In a speech that will be widely seen as targeting the European Union, Christopher Giancarlo, chairman of the Commodity Futures Trading Commission (CFTC) said the agency was guilty of overreach by regulating firms that are not based in the United States but do business with U.S. customers.
This “overly expansive, unduly complex” approach has shown insufficient deference to other countries even though they comply with the same international standards applied in the United States.
The CFTC will soon publish a “White Paper” setting out a more thoughtful “next act” for regulating the cross border swaps market, Giancarlo told an audience in London’s financial district.
“In a number of areas, the White Paper will recognise deficiencies in the CFTC’s current approach to regulating cross-border activities and seek to recalibrate the CFTC’s cross-border approach based on a set of guiding principles,” he said.
“The CFTC should pursue multilateralism, not unilateralism for swaps reforms that are designed to mitigate systemic risk,” he said.
The next version of CFTC cross-border rules would focus better on addressing actual systemic risks from foreign firms to the U.S. financial system, and leave supervision of trading practices and market structures like clearing houses to their home supervisor, Giancarlo said.
This pledge follows CFTC criticism of a draft EU law that would give EU regulators a role in supervising U.S. based clearing houses that service customers in the bloc, encroaching on the CFTC’s turf.
Giancarlo has said it should be amended to avoid harm to U.S. businesses, saying the EU should defer to the CFTC when it comes to supervising American clearing houses.
Giancarlo said an approach based on deference when it comes to margin, trading venues, clearing houses, or other areas, is essential to ensuring a strong and stable derivatives market that supports economic growth both within and outside the United States.
The call for a “deference”-based approach between regulators from different countries will be welcomed by Britain in its bid to maintain London as Europe’s biggest centre for clearing euro-denominated derivatives after leaving the EU next March.
France has said large chunks of euro clearing should move to the euro zone after Brexit so that EU regulators can supervise the activity properly.
Britain says this is not necessary as it will still be complying with the same international financial rules as those enforced in the bloc.
Giancarlo did not elaborate on what the CFTC would do if a foreign regulator failed to reciprocate U.S. deference.
Reporting by Huw Jones; editing by David Evans