The European Commission proposal to regulate benchmarks “would have adverse market consequences” and should be amended Timothy Massad the US Commodity Futures Trading Commission (CFTC) Chairman said in a letter to US policy makers last week. The US may be pressed into stricter regulation of benchmarks as draft European rules may exclude the region’s banks and asset managers from using certain benchmarks. In his 19th November letter to lawmakers on the House Subcommittee on General Farm Commodities and Risk Management, Massad warned that the proposal could inhibit global markets.
The current proposal would prohibit European firms from using benchmarks created outside the European Union without a European Commission determination that that benchmark administrator has supervision equivalent to that required in the EU. In the absence of an applicable US supervisory regime, the “equivalency requirement would prohibit EU institutions from hedging using thousands of products traded on US futures exchanges and swap execution facilities,” Massad wrote.
A newly constituted European Parliament economic and monetary affairs committee is reconsidering the benchmark proposal from the European Commission after the previous parliament’s committee failed to reach a consensus. The new committee’s Dutch liberal draftswoman Cora van Nieuwenhuizen has said she seeks agreement in the parliament by March 2015 with finalised regulation with the European Council coming in the summer. Global policy makers have sought to tighten up systemic risk with stricter rules on trading and clearing derivatives while also regulating benchmarks after numerous manipulation scandals.
Europe wants to prohibit the use of benchmarks that are created by administrators located outside the EU unless they are approved by the EU. To gain approval the administrator of the benchmark must prove that they and the benchmark are subject to a regulatory regime deemed equivalent. Many benchmarks from the US or Asia have less stringent regimes and would therefore fall foul of the proposed new rules as they stand. The failure to permit the US benchmarks has raised concerns that European institutions will be shut out of using US futures exchanges to hedge their risks.
Massad warned Congressmen Michael Conaway, chairman of the House Agricultural Committee, and David Scott, who also sits on the Committee, of his concerns that the current EU benchmark reform proposals would require equivalent supervision of benchmark administrators by US authorities. “Because of the potential consequences on financial markets, the CFTC also stands ready to work with its counterparts in the US financial regulatory sector to address this issue further,” he wrote. He added that he has “taken several recent opportunities to convey to European officials our concerns regarding the impact of any benchmark reform legislation that would require equivalent supervision of benchmark administrators by US authorities.”
Industry bodies, including the European Banking Federation, the International Swaps and Derivatives Association, the Futures Industry Association and the Australian Financial Markets Association have warned the EU proposals risk creating confusion and uncertainty in global markets, failure to agree global standards could dramatically force up the costs of trading and fragment the market.
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