The WFE proposes improvements to CFTC’s non-US CCP supervision proposals

By: The WFE Focus Team Sep 2019

The WFE has published a letter to the Commodity Futures Trading Commission (CFTC) concerning two proposals that stand to impact the supervision of non-US central counterparties (CCPs) – namely, its Proposal on the Registration with Alternative Compliance for Non-U.S. Derivatives Clearing Organizations and Proposal for the Exemption from Derivatives Clearing Registration.

The WFE has long advocated for adherence to the G20-endorsed principle of regulatory deference, and has broadly welcomed the CFTC’s efforts at codifying practices for swaps CCPs outside the US that allow for such deference. At a time when global securities supervisors are putting increasing focus on reducing regulatory-driven market fragmentation, these efforts by the CFTC are a step in the right direction, and present a window of opportunity for EU and US regulators to converge their approaches in the spirit of international comity.

Nevertheless, WFE members believe the proposals can be improved to make them more risk-sensitive and better tailored to today’s global markets. In the letter, the WFE recommends the CFTC:

  • Recalibrate the operation of threshold tests (regarding substantial systemic risk) to enhance risk-sensitivity;
  • Add a nuance to the consideration of the potential impact of stress at a clearing member to their US-parented entity and the US financial system; and
  • Introduce procedures for communication with a CCP and its home state supervisor to promote fairness and due process.

Promoting international regulatory coherence is a strategic priority for the WFE and its CCP members: the Federation recently wrote to ESMA setting out principles that could avoid international regulatory dissonance in the cross-border supervision of CCPs, as the EU sets about adopting rules to implement EMIR 2.2, and also commented on the initial legislative proposal for EMIR 2.2. Ahead of the June 2019 G20 Finance Ministers and Central Bank Governors meeting, the WFE published a statement entitled ‘Financial Stability through International Regulatory Coherence’ which discussed cross-border fragmentation arising from unjustified dissonance between jurisdictions’ financial services regimes.

You can read the WFE letter in full here.