European Union attempts to win exemptions from U.S. rules for swaps trading platforms that take effect today have been hampered by the partial shutdown of the American government.
Michel Barnier, the EU's financial services chief, was unable to broker a deal with the U.S. Commodity Futures Trading Commission ahead of a budget standoff that's left many government offices shuttered.
"I remain confident in our common capacity to find a definitive agreement," Barnier said in an interview today. What is required is "to confirm and clarify," a broader deal reached by the Commission and CFTC in July.
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The CFTC is overseeing the new platforms as part of an effort required under the 2010 Dodd-Frank Act to bring greater competition and transparency to swaps traded by firms including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Barclays Plc. Largely unregulated trades helped fuel the 2008 credit crisis and led to the $182.5 billion taxpayer-rescue of insurer American International Group Inc.
"European liquidity is being hit by U.S. regulatory uncertainty," Sassan Danesh, Co-Chair of the Global Fixed Income Committee at FIX Trading, said in an interview.
Gary Gensler, the CFTC's chairman, has held firm on the Oct. 2 deadline for Sefs to register with regulators, while the agency has granted temporary delays related to some other aspects of the swaps rules.
The situation "is clearly problematic, as American rules on Sef registration will enter into force today and we haven't received at this stage meaningful relief for European companies," Barnier's spokeswoman Chantal Hughes told reporters in Brussels today, referring to the U.S. standards on swap-execution facilities, or Sefs.
"At technical official level there is no contact at this point in time, but there is contact at more senior political levels," Hughes said. "The CFTC is indeed closed."
Barnier wrote to Gensler this week urging the U.S. to delay the registration requirements until March to avoid disruptions in the $633 trillion global market and to give the EU time to complete work on its own legislation. He told Gensler the EU is concerned that its firms could face overlapping rules that ultimately could lead to a balkanization of financial markets. Hughes said Gensler hasn't yet replied.
Big Players
The risk arising from the U.S. rules is that "some European platforms may not wish to trade with American counterparties," Danesh said. "It's a big deal."
"For example, taking a U.S. broker such as JPMorgan, that's a big player: if they stop trading on European platforms how much liquidity will drop off?," Danesh said.
The CFTC completed rules governing swaps transactions in May. Today's deadline is for companies to register with the U.S. as offering Sef services, and in doing so to accept American regulations.
"We can't of course tell European companies exactly or directly what they should do with respect to the American rules, which are coming into force today," Hughes said.
"In practice, we don't expect trading to stop overnight, but the effect is likely be less transparency, liquidity fragmentation and higher funding costs with potential impacts on the real economy," Hughes said.
Calls to the CFTC today went through to an automated answering service.
A Sef proposed by Bloomberg News parent Bloomberg LP is among venues — including those from IntercontinentalExchange Inc., MarketAxess Holdings Inc. and Javelin Capital Markets LLC — that have won temporary approval from the CFTC, according to the regulator's website.
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