Equivalence Agreement Might Be Imminent

Currently, CFTC Chairman J. Christopher Giancarlo is on a 10-day trip in Europe. Derivatives industry attorneys speculate that a European equivalence pact on swap execution rules might come into fruition very soon. If this happens, it would enable swap trading on platforms located in both, the U.S. and Europe. An absence of this agreement would isolate  U.S. and EU swap execution facilities, making trading more expensive as well as hinder the flow of current liquidity. This agreement can happen as early as January 2018.

A trade execution mandate is sought to be administered by the EU. This move might be part of the general EU financial reform that is looking toward restricting particular swap trading on non-European registered trading platforms. Until then, Europeans can use U.S. based swap execution facilities. On the other side, CFTC prohibits U.S. traders from trading swaps on European platforms.

An equivalence agreement seems to likely happen as unlike former CFTC chairmen, Giancarlo’s evident approach to revamp the Dodd-Frank trade-execution rules would put it at par with European regulations. In particular, Giancarlo wants to mandate that trades occur through other than the conventional models, like through an order book. Other models include voice brokering, auctions, and volume match.

Clearing equivalence discourse between the U.S. and EU has been taking as long as five years. It is possible that both sides won’t come to an agreement by January’s deadline. According to CFTC’s Erica Richardson, the 10-day trip is treated as a “relationship-building” period between the two sides. Giancarlo is showing respectable relational gestures. Micah Green, head of Steptoe & Johnson LLP’s cross disciplinary financial services practice in Washington, thinks that the chairman’s approach in domestic policy approach will be similar to the approach he will take with international regulators. Micah Green predicts that the chairman’s approach “will be well received by European regulators.”

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