U.S. and Europe Do a Derivatives Deal

Clive Crook is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was chief Washington commentator for the Financial Times, a correspondent and editor for the Economist and a senior editor at the Atlantic. He previously served as an official in the British finance ministry and the Government Economic Service.
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The Commodity Futures Trading Commission and European Union regulators reached a deal today on cross-border rules for trade in derivatives -- a $633 trillion (yes, trillion) global market. This ended, for now, a debate that had pitted not just the EU but also a lot of U.S. politicians, banks and regulators, including some at the CFTC, against the commission's chairman, Gary Gensler.

The quarrel, as Bloomberg View editorsexplained, was less about the content of the rules -- everybody agrees they need to be tightened -- as about which regulator should be in charge. Irked by slow progress elsewhere, Gensler has been pressing for expansive U.S. jurisdiction over the global market. Essentially, he wanted oversight of any deal that involved a U.S. interest -- including deals done abroad by foreign banks, if one side of the transaction involved a guarantee by a U.S. parent.

Europe called that a power grab, which it was. The industry said it would expose the cross-border business to multiple jurisdictions and conflicting requirements, which it would have done.

The deal is a compromise -- and a complicated one, but mostly based on the principle of mutual recognition. The CFTC has agreed to step back on transactions where the EU would expect to have jurisdiction and European rules are "essentially identical" to its own. In some cases, there will be "transitional relief" to give Europe time to catch up. Other points of contention have been settled, smoothed over or deferred.

The result is hardly elegant. U.S. banks operating in Europe will be able to choose to comply with some EU rules instead of CFTC rules, and the application of other CFTC rules will be delayed. But the alternative was worse -- overlapping systems of incompatible regulations.

In the end, Gensler blinked, partly under pressure from U.S. Treasury Secretary Jacob Lew. The deal is an accommodation of the kind he had been resisting. But on the underlying disagreement -- about Europe's failure to act promptly -- he made his point, and has something to show for it. The agreement puts pressure on Europe to get a move on, and that's in everybody's interests.

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To contact the author on this story:
Clive Crook at ccrook5@bloomberg.net