U.S. Regulator Says Global Derivatives Rules Will Be Similar

A top U.S. regulator said on Tuesday that transatlantic trading requirements for derivatives were likely to vary somewhwat but that the differences should be kept to a minimum.

The United States has approved a reform of Wall Street which requires that contracts in the $615 trillion derivatives market be standardised where possible, cleared and reported, and with trading done on an exchange in some cases.

The European Union has proposed a draft law along similar lines but won’t address where derivatives should be traded until next year, raising the prospect of competitive distortions in a global sector whose opaqueness during the financial crisis alarmed regulators.

“There will be some differences but I think in the main these (laws) are going to be very similar,” Gary Gensler, head of the U.S. Commodity Futures Trading Commission, told reporters.

U.S. rule-writing teams were being asked to comply with the new Wall Street reform and to try to make it consistent with what was happening internationally.

“I think we will be able to do that in clearing. We certainly will be able to do that in swaps data repositories, and I think we will be able to do that in capital, margin and business conduct,” Gensler said.

The remaining issue was how to coordinate where derivatives should be traded, Gensler said on the sidelines of his third visit to Brussels in a year or so as part of transatlantic efforts to forge a common regulatory approach.

He expects Europe to address derivatives trading when it comes to drafting amendments to a review of an existing EU law on securities trading early next year.

“I am optimistic it will happen, it just has a different timing… I am not worried,” Gensler said.

U.S. regulators face tight deadlines to implement financial reforms, with most regulations required to be in place by July 15, and some even earlier.

Gertrude Tumpel-Gugerell, a member of the European Central Bank’s executive board, said the draft EU law on derivatives needed several improvements.

It should make clear that it was up to central banks whether to grant clearing houses access to their liquidity, she said.

“The first line of defence, including for distressed market conditions, must always be the appropriate liquidity risk management of the central counterparties themselves,” Tumpel-Gugerell told the Eurofi forum on EU financial regulation.

Central banks should also have a say in setting out prudential requirements for clearers and in whether those from outside the EU can operate in the bloc, she added.

In his speech at Eurofi, Gensler said U.S. regulators now have the ability to limit the number of contracts traders can hold in credit default swap contracts as well as physical commodities.

The new Wall Street reform law enacted in July requires regulators to set limits on the positions traders can hold across swaps markets — part of a sweeping set of rules giving them power to police the $615 trillion over-the-counter derivatives markets.

“It is important that regulators have the authority to set position limits on both physical commodities derivatives as well as credit default swaps,” Gensler said.

“These authorities, along with new anti-manipulation authorities, will allow us to better protect against abusive practices in the CDS market,” he said.

Credit default swaps have been blamed for amplifying concerns about corporate and sovereign credit quality, and came under fire in the government bailout of U.S. insurer AIG and the spiraling debt situation of countries such as Greece.

(Additional reporting by Christopher Doering; Editing by Hugh Lawson)