May 21, 2014
I thank Acting Chairman Wetjen for calling this meeting to discuss the importance of mutual recognition under principles of international comity.
Markets and market structures are beginning to evolve in response to the varying regulatory tracks that different jurisdictions are taking in their approach to implementation of G20 OTC derivatives reforms. In order to avoid shifts in the global swaps market business as a result of regulatory differences that could impair liquidity and access, it is critically important that international regulators come together now to harmonize swap data reporting, exchange trading, and central counterparty (CCP) clearing before market fragmentation and contraction of liquidity hardens and becomes permanent.
While it is interesting to think about the possibilities afforded by exempt Designated Clearing Organizations (DCOs) and exempt Swap Execution Facilities (SEFs), I believe we need to focus more closely on resolving the regulatory differences between jurisdictions to enable substituted compliance or equivalence, based on mutual recognition under principles of international comity.1 For example, in comparing a SEF, Qualified Multilateral Trading Facility (QMTF), or possibly an exempt SEF proposal, it is not clear how any of these will provide a solution that is superior to mutual recognition of existing SEF and MTF market structures in the U.S. and Europe.
Using the QMTF framework as an example, I fear that we are proceeding down a regulatory path that highlights our differences rather than recognizing our commonalities. I will ask our panelists and GMAC representatives to describe what they believe is the ideal regulatory path forward regarding mutual recognition of U.S. and EU exchange trading rules.
With regard to exempt DCOs, I believe that the Commission needs to think carefully before proceeding on such a proposal. This is especially important until we at least have an understanding of the mutual recognition regimes under which jurisdictions will recognize the CCPs that meet the standards set forth in the agreed-upon Principles for Financial Market Infrastructures (PFMIs), particularly since many jurisdictions have already adopted the PFMIs. Given that the timeframe to mandate clearing under EMIR is looming, international regulators need to make progress on this front to avoid further market fragmentation.
Finally, let me make my plug for mutual recognition and harmonization of swaps data reporting. Right now, the U.S. and EU are working separately to resolve data quality issues that should instead be resolved together. And, so far we are not taking the necessary steps to set the groundwork for an agreement that would allow our jurisdictions to share this swaps data. It is my sincere hope that negotiations will not only begin immediately, but that our jurisdictions will simultaneously engage in harmonization efforts that will allow us to access and share high-quality, low-cost data that will improve regulatory oversight of the entire swaps market.
In light of the discussion today, I am reminded of the “Path Forward” document dated July 11, 2013. I believe we need to return to the spirit of cooperation embodied in that document before we undertake new and potentially confusing exempt regulatory constructs.
I appreciate the work of the staff to prepare this meeting, and I most certainly appreciate the attendance and participation of our witnesses and GMAC members that have made time in their busy schedules to assist the Commission in its deliberations. I look forward to hearing from the participants.
1 Letter from Commissioner Scott D. O’Malia, CFTC, to Commissioner Michel Barnier, European Commission (May 6, 2014), available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/omailalettertobarnier050614.pdf.
Last Updated: May 21, 2014