European swap-trading platforms won a reprieve from Dodd-Frank Act rules in a regulatory deal that puts U.S. and European authorities on a path toward sharing oversight of most of the $693 trillion global market.
The U.S. Commodity Futures Trading Commission (CFTC) and European Union (EU) officials, in an agreement announced yesterday, granted the trading facilities relief until March 24 from having to register in the U.S. At the same time, U.K. and European regulators are implementing trading rules designed to meet U.S. standards and that could then be relied on to substitute for Dodd-Frank oversight in the long term, said Mark P. Wetjen, acting CFTC chairman.
"There is going to be every incentive to make their regime as close as possible to ours," Wetjen said in a news conference in Washington. "We're obviously sensitive to the so-called regulatory arbitrage. We don't want to incentivize people to move their trading away from the U.S."
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The CFTC said in a summary of the deal that it would revoke the relief to trading platforms if they fail to meet U.S. conditions for competition and transparency.
Many interest-rate swaps will be required to trade on swap execution facilities, or Sefs, in the U.S. under CFTC rules starting Feb. 15. Platforms owned by Tradeweb Markets LLC, ICAP Plc, GFI Group Inc., and Bloomberg LP, parent of Bloomberg News, have temporarily registered with the CFTC. The Sefs facilitate transactions among banks and also between banks and asset managers or other clients.
The international reach of CFTC rules has been among the most contentious issues between the Washington-based regulator and financial firms that operate around the world. Wall Street lobbying groups that represent banks, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., sought in a December lawsuit to limit the agency's ability to impose rules outside the U.S.
Yesterday's deal to grant relief to EU trading platforms known as multilateral trading facilities (MTFs) may lead European and U.S. authorities to eventually share oversight of most of the global swaps market. Wetjen said U.S. and European regulators oversee about two-thirds of the market, split about evenly between the regions.
"Today is an important step but far from the final one on the road towards global convergence," Michel Barnier, the EU's financial services chief, said in a joint statement with the CFTC.
No-Action Letters
The CFTC published two so-called "no-action letters" to give the trading platforms the relief. Wetjen said the primary platforms affected are in London.
"This pragmatic approach will enable U.S. participants to continue participating on European trading venues, so long as those platforms meet certain conditions, hopefully minimizing the market fragmentation that has occurred," Robert Pickel, chief executive of the International Swaps and Derivatives Association, said in a statement.
The group, whose membership includes Credit Suisse Group AG and Deutsche Bank AG, said in December and January that traders outside the U.S. have been avoiding trading with U.S. firms since an Oct. 2 deadline for platforms to register with the CFTC. As a result, the U.S. and European markets have become increasingly disconnected, Isda said.
EU MTFs will be eligible for the relief if they meet "certain reporting and clearing-related requirements" and other conditions, the regulators said. The EU's work to toughen its own regulations mean the EU platforms "are expected to" meet the criteria, they said.
The criteria include requiring swap-buyers on platforms to request price quotes from more than one seller and have trade data involving U.S. traders sent to a CFTC-regulated information repository, according to a summary of the conditions. The European platforms must give impartial access to traders and have comparable regulatory oversight to win the relief.
The CFTC granted the relief until March 24, in order to give time for the trading platforms to contact the U.S. regulator and apply for the exemptions. The agency is also working on a formal rule proposal to determine how the CFTC will oversee foreign-based trading platforms.
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