The EU Is Emerging as the New Sheriff for Global Financial Markets
From its Chicago headquarters, CME Group Inc. offers options, swaps, and futures contracts designed to help investors mitigate the potential fallout from, say, a failed gold mine in Africa, a spike in Mexican interest rates, or an oil spill in the North Sea. Today the company itself faces growing risk from an unexpected quarter: Brussels.
European Union regulators are seeking greater influence over the supervision of financial companies, including those based in the U.S., such as CME, and in the U.K. once Britain leaves the bloc. The EU is proposing that clearinghouses—financial middlemen—in the region undergo inspections by European supervisors and be required to respond to the European Central Bank in emergencies. Those rules present “grave concerns,” says Sunil Cutinho, president of CME Clearing, who on June 6 told industry executives in London that the EU’s growing reach threatens a long-standing practice of deferring to oversight in a company’s home country. “There was a time when regulators trusted each other,” Cutinho said, echoing calls by CME’s main regulator, the Commodity Futures Trading Commission, for the EU to rely on cooperation with U.S. authorities.
As the U.S. rolls back regulations enacted after the 2008 crisis, the EU is emerging as the new sheriff for international markets. Europe is introducing standards for everything from investment research to trading to oversight of client data—rules with repercussions from New York to Hong Kong.
When the EU introduced its General Data Protection Regulation last month, Facebook Inc. and Microsoft Corp. said they’ll largely adhere to the directive everywhere they operate, not just in Europe. Anu Bradford, a professor at Columbia University’s law school, calls it the “Brussels effect.” Multinationals complying with European regulations to gain access to the region’s €15 trillion economy sometimes find it’s cheaper and easier to implement a blanket global policy. “The EU has become more self-conscious of its ability to set international standards and is embracing that opportunity,” Bradford says.
New EU guidelines give authorities in Brussels greater sway over regulations made by watchdogs in other countries. For foreign companies to do business in the EU without setting up a subsidiary in the bloc, they and their home country typically need a so-called equivalence finding. These rulings from the European Commission, the EU’s executive arm, assess whether foreign statutes are sufficiently strong to protect European consumers and corporations. As the clock ticked down to the January start of the EU’s revised Markets in Financial Instruments Directive, or MiFID II, brokerages warned of a rupture in global markets if the EU were to find that other countries’ laws weren’t tough enough. The EU approved the U.S. rules just before Christmas, but a similar authorization for Switzerland expires in December and is subject to further negotiations.
The U.S. Securities and Exchange Commission had to take emergency action to limit the impact of MiFID II after American companies warned that a key part of the law would threaten their investment research business. The U.S. bars Wall Street brokers from accepting payments for research, but MiFID II requires money managers to pay separately for research and trading services. The SEC said it would suspend enforcement of its rule for some investors in Europe while it assesses the impact.
The EU is in the process of toughening its equivalence standards, such as those for derivatives clearinghouses like CME. At a London industry conference, Jochen Metzger, an official at Germany’s central bank, sat on a panel next to a counterpart from the U.S. and said he’s “a bit skeptical” about cooperation among international authorities. Collaboration works in “fair weather” but can prove more difficult in crises, Metzger said, calling for greater European oversight of big foreign companies. Brian Bussey, head of the CFTC’s clearing division, countered that cooperation has worked well over the years and that the U.S. has a history of deferring to foreign regulation of major clearinghouses abroad. As the discussion heated up, Bussey urged pragmatism, finally telling Metzger: “We’re going to need to go for a drink to talk this through.” —With Alexander Weber