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World Waits for U.S., EU to Solve Derivatives Spat: Faull

The U.S. and the European Union must resolve a disagreement on cross-border derivatives trading to set an example for other nations seeking clarity on a trans-Atlantic standard, a top official from the European Commission’s financial-markets agency said today.

“There’s frustration building up in the rest of the world,” said Jonathan Faull, the commission’s director general for internal markets and services, at an Institute of International Finance event in Washington.

In Canada, China and other trading hubs, authorities are watching to see how the EU and the U.S. will end their long-running dispute over how to align derivatives rules. This has led regulators such as Mark Carney, the Bank of England chief who leads the Financial Stability Board, to say “would you please sort this out and come back with a report that you’ve done it so that we have a system which the others can understand and plug into?” Faull said.

The Commodity Futures Trading Commission is giving European swap-trading platforms until May 15 to show they offer sufficient competition between banks and other firms to remain exempt from direct U.S. oversight. The EU has sought a longer-term exemption for its firms along with more mutual recognition of transatlantic trading rules.

When financial regulations don’t line up, even if it’s on just 5 percent of issues, it creates a “danger of the purpose of exercise being thwarted because the rules simply miss each other,” Faull said. The last areas of difference “can cause tremendous friction” and “there will be grit in the machine that doesn’t have to be there,” he said.

Global regulators also need to come up with a strategy for handling central clearing counterparties if they run into difficulty, a problem raised recently by ECB Executive Board member Benoit Coeure. This issue is now rising to the top of the agenda, Faull said.

“It is a problem we should anticipate and deal with and then hopefully it never happens,” he said.

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