Cross-border rules under scrutiny as Giancarlo speaks out

The US Commodity Futures Trading Commission (CFTC) has been grappling with the difficulties of being at the forefront of the international proposals to standardize the regulation of OTC derivatives in order to ensure a method of overseeing cross-border business activity.

Whilst many of the G20 nations with developed financial markets economies are in agreement with the CFTC, an element of doubt has begun to creep in within the US regulator’s own operations as to its ability to ensure jurisdiction over many nations, even with the cooperation of their national regulatory authorities.

Yesterday, CFTC Commissioner Chris Giancarlo stated “I believe my agency, the CFTC, started the current rift in cross-Atlantic swaps cooperation with its guidance.”

Commissioner Giancarlo considers that as opposed to maintaining its current line on cross-border guidance, the CFTC should start a more formal rule-making proces and take in comments from within the industry.

The cross-border aspect of the CFTC’s rules has generated a long, drawn-out dialog with the European Commission, which would prefer that the CFTC would rely more on direction from the European Union for the regulation of European companies working in America, and U.S. banks operating in Europe.

Although doubt over the power to enforce a global regulatory structure had been expressed in April this year in the form of a 48-page bill which was co-sponsored by Democratic Representatives Collin Peterson of Minnesota and David Scott of Georgia, and Republican Representative K. Michael Conaway of Texas,and issued by the House of Agriculture Committee, which has jurisdiction over the CFTC in rule making, election of commissioners and general governance, yesterday’s indication was the first time that Commissioner Giancarlo, who previously held an executive position at swaps broker GFI, gave a comprehensive oversight of his views after joining the CFTC in June. Conflicting views among the agency’s political appointees are common.

That particular legislation which was set forth in April this year represented the first step in a broad congressional effort to review commodity laws since the CFTC implemented more than 60 regulations to increase oversight of swaps traded by firms including Goldman Sachs Group Inc., JPMorgan Chase & Co. and BP Plc.

Therefore, as with many other regions worldwide, high frequency trading (HFT) has now become the subject of congress-level discussion within the United States, the region which has a long standing predilection for the use of algorithms and high speed trading among the institutional trading desks of Chicago and New York.

“I intend to do everything I can to encourage the CFTC to replace its cross-border (guidance) with a formal rulemaking that recognizes competent non-U.S. regulatory regimes,” Giancarlo said at a conference in Switzerland.

Last week, a U.S. court largely rejected an attempt to throw out the cross-border policy by banking groups, who had also argued that the agency had dodged a formal rule-making process by adopting the guidance instead.

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