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US and EU reach agreement on derivatives regulation

A year of complex negotiations between European Union (EU) and US regulators have at last reached agreement on how best to police global derivatives trading. The breakthrough divides up responsibilities and avoids a dispute that could have disrupted global markets and trading.

The US Commodity Futures Trading Commission (CFTC) and the EU’s executive, the European Commission (EC), announced a “path forward” on a package of measures for cross-border derivatives regulation. Preceded by difficult negotiations between the US and European finance ministers, the agreement will smooth the path for the two sides in their on-going talks to reach a landmark free trade agreement.

The breakthrough also paves the way for the CFTC’s cross-border guidance to be adopted, following a controversial three-year process during which it has been writing rules to rein in the US$633 trillion swaps market. The agreed package of measures puts the EU and the US on a path to recognise each other’s rules as essentially the same, so that they can rely on the relevant domestic authorities to apply and enforce them.

While Dodd-Frank and the European Market Infrastructure Regulation (EMIR) will remain as the two economic blocs regional regulatory mechanisms for enforcing the wishes of the Pittsburgh G20 meeting to introduce central repositories and effective force derivatives trading back ‘on exchange’ therefore, there is now agreement that the two initiatives should adhere to a common global standard, which should reduce cost and the chance for regulatory arbitrage if it is adhered to.

“The CFTC and the European Commission share the view that jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes,” the regulators said in a joint statement.

CFTC chairman Gary Gensler, who urged strict oversight of foreign trading to ensure blow-ups abroad do not hit US taxpayers, said the deal was a “significant step” in the “mutual journey to bring transparency and lower risk to the swaps market worldwide”.

Michel Barnier, the EU commissioner responsible for the reforms, added: “Our discussions have been long and sometimes difficult but they have always been close, continuous and collaborative talks between partners and friends.”