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European Commissioner for the Internal Market and Services
Interdependent swaps markets need interactive cross-border rules
Brookings Institution - Restoring Momentum in Transatlantic Cooperation on Financial Reform
Washington DC, 15 July 2013
Ladies and gentlemen,
I would like to thank both the Global Financial Markets Association and the Brookings Institution for inviting me to speak bright and early on a Monday morning.
The ancient Mesopotamians invented derivatives, or ‘swaps’ as you call them here in the US, in 1750 BC.
They did not know that swaps would one day bring the global financial system to its knees.
Later, the Greek philosopher Aristotle wrote his book on ‘Politics’. In ancient Greece, olive merchants earned fortunes on their swap deals.
But Aristotle could not know that one day swaps would cost his country dearly. And take its toll on Europe’s GDP.
And neither could he predict that Europe and the US would spend years sorting out how to regulate cross-border swaps. Our discussions became more concrete one year ago, when Commodity Futures Trading Commission Chairman Gary Gensler published his proposals.
Europe and the US share the same commitment and the same goals in this area.
They were agreed three and a half years ago when the leaders of the G20 nations met in Pittsburgh. They agreed to an ambitious global regulatory reform of the swaps markets. They set out to do three things.
First, clearing. To reduce risk in our financial firms and system by clearing all standardised swaps through central counterparties.
Second, transparency. To shed light on this opaque market and report all trades to trade repositories. We need to know where risk is building up in the system.
Third, trading. Where appropriate, to move standardised swaps to venues to increase market transparency.
Europe has rapidly implemented those regulatory reforms. In doing so, we managed to break records. Our law (called 'EMIR' European Market Infrastructure Regulation) was adopted within 24 months. It has been in force since last August. And a second set of technical rules was adopted 6 months later. They became law in March.
Our reporting requirements will apply after the summer. Our clearing rules in 6 months' time. Agreement has now been reached by our Finance Ministers on our mandatory trading rules.
It is fair to say that we are moving fast in regulatory reforms.
Our rules are also robust. Often even identical to those in the US. In some respects they are even tougher.
So regulatory reform in Europe has been swift and solid. But it will only reach its full potential if our rules work seamlessly with similar laws beyond our borders.
Swaps are truly international trades. They are not bound by geographical borders. And the same applies to swaps regulation in the US.
Cross-border regulation is of critical concern. Regulators have spent two years discussing their international patchwork of local rules. And how they could work together so that all trades would be regulated in broadly similar ways. Whoever agreed a trade or wherever it was booked.
Uncoordinated efforts to regulate these markets are like squeezing a bar of soap with wet hands: it slips from your hands. Trades will be re-booked. Markets will fragment. The G20 reform objectives will not be met.
That is why last week's agreement with the CFTC is so important. It resolves many issues for cross-border trades.
The agreement with the CFTC is fundamental. And that is why I appreciate so much everything Gary Gensler has done to make the agreement possible. The CFTC regulates the majority of swaps trades here in the USA. And the majority of global swaps are between the US and Europe.
Our discussions have been long and sometimes difficult. But, together with the European Securities and Markets Authority, they have been close, continuous and collaborative.
As you would expect from good partners and friends.
And as an old African proverb says “if you want to go fast, go alone. If you want to go far, go together”. We took the right road and we followed a common path together.
The key elements of our ‘common path forward’ for cross-border swaps respond to the problems of two rules (EMIR and Dodd-Frank) covering the same trade.
We have agreed on five important elements.
First, a narrower territorial scope. Firms should be subject to only one set of rules.
Second, more mutual recognition (or ‘substituted compliance’ as you call it here). We have established that our rules are essentially identical in important areas. This means that we will allow firms from the US and the EU to choose which rules to apply to a trade: EMIR or Dodd-Frank.
Third, a transitional regime for some European Central Counterparties. This will prevent them from being forced to close down clearing US trades.
Fourth, European trading venues will have a temporary exemption from US trading rules. This bridges the gap until new European rules for Markets in Financial Instruments - which deal with swap trading - have been adopted.
And fifth, we have taken measures to avoid regulatory arbitrage between our rules. And we are closing loopholes. We will make sure trades between branches or guaranteed subsidiaries will be regulated.
We have achieved a lot. Some work is still needed. For instance on margin requirements for CCPs.
The most important message is that Europe and the United States are leading by example. We invite others countries to join this approach. So we can make sure G20 commitments are applied sensibly and rigorously to cross-border swaps.
It is only by full implementation of G20 commitments that countries will have standards that are of high quality and comparable. This is essential for regulators and supervisors to have the necessary confidence in each other. And for international business to flourish. If regulators cannot have confidence in the standards applied by their colleagues abroad, markets end up fragmented.
This brings me to transatlantic trade in general.
As you know we launched our EU-US trade negotiations last week. These are about growth and leadership.
Growth in terms of our economies and jobs for our citizens.
Leadership because we can find solutions to trade problems that we can’t find in multilateral discussions. Those solutions will carry weight because they would apply to half of the world economy. They would form a good basis for future global discussions when the time is ripe.
The EU is committed to including financial services regulation in this growth and leadership agenda.
And our discussions and recent agreement on swaps is the best example why regulation of financial services must be included.
The real barriers to EU-US trade and investment are in the details of regulatory policy. The rules, processes and procedures of regulation.
Our discussions on swaps have shown that regulatory barriers can block trade outright. Make it too expensive to be viable. Fragment global markets. Or just act as a drag on overall economic efficiency. And raise costs for Main Street companies, not just Wall Street banks.
They are the barriers of the future for world trade relations.
We all know dealing with financial regulation is complex and politically sensitive. But it protects our economies from risks to their citizens and financial security.
But the stark reality is that our financial sectors know no borders. They are inter-twined and inter-dependent. This is the fundamental lesson of the financial crisis.
The agreement on swaps is a huge achievement.
But it’s not sure that it is a model to be followed again. It is proof that we need a pre-agreed framework to discuss and resolve these issues. A framework that gives legal certainty and process. A framework that will avoid brinkmanship and uncertainty in our financial markets.
We still face difficult discussions on banking, investment firms and in other areas.
Our agreement on swaps proves that we can trust each other. We have passed that test case.
Now we must demonstrate joint leadership and raise the bar in tomorrow’s world of financial regulation.
It is our only way to achieve global and lasting financial stability.