What Gary Gensler, the Igor of Frankendodd, hath wrought
I’ve
spent quite a bit of time in Europe lately, and this gives a rather interesting
perspective on US derivatives regulatory policy.
Specifically,
on the efforts of Frankendodd’s Igor, Gary Gensler, to make US regulation
extraterritorial
Things came to a
head when the head of the CFTC’s clearing and risk
division, Ananda Radhakrishnan, said ICE and LCH, both of which
clear US-traded futures contracts out of the UK, could avoid cross-border
issues arising from inconsistencies between EU and US regulation (relating
mainly to collateral segregation rules) by moving to the US:
Striking
a marked contrast with European regulators calling for a collaborative
cross-border approach to regulation, a senior CFTC official said he was “tired”
of providing exemptions, referring in particular to discrepancies between the
US Dodd-Frank framework and the European Market Infrastructure Regulation (Emir)
on clearing futures and the protection of related client collateral.
“To me,
the first response cannot be: ‘CFTC, you’ve got to provide an exemption’,” said
Radhakrishnan, the director of the clearing and risk division at the CFTC.
Radhakrishnan
singled out LCH.Clearnet and the InterContinental Exchange as two firms
affected by the inconsistent regulatory frameworks on listed derivatives as a
result of clearing US business through European-based derivatives clearing
organisations (DCOs).
“ICE
and LCH have a choice. They both have clearing organisations in the United
States. If they move the clearing of these futures contracts… back to a US only
DCO I believe this conflict doesn’t exist,” he added.
“These
two entities can engage in some self-help. If they do that, neither (regulator)
will have to provide an exemption.”
It was
not just what he said, but how he said it. The “I’m tired” rhetoric, and his
general mien, was quite grating to Europeans.
The
issue is whether the US will accept EU clearing rules as equivalent, and
whether the EU will reciprocate. Things are pressing, because there is a
December deadline for the EU to recognize US CCPs as equivalent. If this doesn’t happen, European
banks that use a US CCP (e.g., Barclays holding a Eurodollar futures position
cleared through the CME) will face a substantially increased capital charge on
the cleared positions.
Right
now there is a huge game of chicken going on between the EU and the US. In
response to what Europe views as US obduracy, the Europeans approved five
Asian/Australasian CCPs as operating under rules equivalent to Europe’s,
allowing European banks to clear though them without incurring the punitive
capital charges. To
emphasize the point, the EU’s head of financial services, Michael Barnier, said
the US could get the same treatment if it deferred to EU rules (something which
Radhakrishnan basically said he was tired of talking about):
“If the
CFTC also gives effective equivalence to third country CCPs, deferring to
strong and rigorous rules in jurisdictions such as the EU, we will be able to
adopt equivalence decisions very soon,” Barnier said.
Read
this as a giant one finger salute from the EU to the CFTC.
So we
have a Mexican standoff, and the clock is ticking. If the EU and the US don’t
resolve matters, the world derivatives markets will become even more
fragmented. This will make them less competitive, which is cruelly ironic given
that one of Gensler’s claims was that his regulatory agenda would make the
markets more competitive. This was predictably wrong-and some predicted this
unintended perverse outcome.
Another
part of Gensler’s agenda was to extend US regulatory reach to entities
operating overseas whose failure could threaten US financial institutions. One
of his major criteria for identifying such entities was whether they are
guaranteed by a US institution. Those who are so guaranteed are considered “US
persons,” and hence subject to the entire panoply of Frankendodd requirements,
including notably the Sef mandate. The Sef mandate is loathed by European
corporates, so this would further fragment the swaps market. (And as I have
said often before, since end users are the alleged beneficiaries of the Sef
mandate-Gary oft’ told us so!-it is passing strange that they are hell-bent on
escaping it.)
European
US bank affiliates with guarantees from US parents have responded by
terminating the guarantees. Problem solved, right? The dreaded guarantees that
could spread contagion from Europe to the US are gone, after all.
But US regulators
and legislators view this as a means of evading Frankendodd. Which illustrates the insanity of it all. The SEF mandate
has nothing to do with systemic risk or contagion. Since the ostensible purpose
of the DFA was to reduce systemic risk, it was totally unnecessary to include
the SEF mandate. But in its wisdom, the US Congress did, and Igor pursued this mandate
with relish.
The
attempts to dictate the mode of trade execution even by entities that cannot
directly spread contagion to the US via guarantees epitomizes the overreach of
the US. Any coherent systemic risk rationale is totally absent. The mode of execution
is of no systemic importance. The elimination of guarantees eliminates the
ability of failing foreign affiliates to impact directly US financial
institutions. If anything, the US should be happy, because some of the dread
interconnections that Igor Gensler inveighed against have been severed.
But the
only logic that matters her is that of control. And the US and the Europeans
are fighting over control. The ultimate outcome will be a more fragmented, less
competitive, and likely less robust financial system.
This is
just one of the things that Gensler hath wrought. I could go on. And in the
future I will.
Content belongs to Streetwise Professor. For the original please click http://streetwiseprofessor.com/
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