If cross-border rules currently proposed by the US Securities and Exchange Commission and the Commodity Futures Trading Commission are not harmonized, international derivatives markets could be damaged, according to exchange executives and derivatives industry leaders, who testified before the US House of Representatives Committee on Agriculture Tuesday.
The cross-border rules are particularly important for large integrated oil and natural gas companies that have operations outside of the US and use swaps products to hedge credit and foreign exchange risks.
"If regulators fail to harmonize, the effects of uncertainty and the prospect for regulatory arbitrage will be damaging," said IntercontinentalExchange CEO Jeff Sprecher. "In order to make long-term business decisions, market participants require certainty that their transactions will not be judged on conflicting standards."
The House has been working to pass a bill that would require the CFTC and SEC to jointly issue rules regarding cross-border application of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was approved by the House Committee on Financial Services May 7.
The CFTC is in the process of finalizing its cross-border proposal over the next eight weeks, CFTC Chairman Gary Gensler said last week. The SEC issued its 1,000-page proposal on cross-border rules May 1.
However, "the SEC and CFTC have failed to coordinate on cross-border rules, so now we have two different definitions of 'US person' for trades with foreign counterparts," Chairman Frank Lucas said in his opening remarks.
Market liquidity and the differing application of the rules between the SEC and CFTC concerned International Swaps and Derivatives Association Chairman Stephen O'Connor, who said, "US regulators should speak with one voice."
Industry leaders also focused on the importance of protecting customer funds before the CFTC reauthorization hearing after the failures of Peregrine Financial Group and MF Global, but thought that proposed rules on residual interest must be reexamined.
The proposal would require futures brokerage houses to maintain funds throughout the day to cover all deficits their customers may incur during a trading day.
Walt Lukken, president and chief executive officer of the Futures Industry Association said, "FIA engaged an accounting consultant to sample [futures commission merchants] on the potential costs of residual interest proposal; the results show that this change could require an additional $100 billion obligation to the customer funds accounts, beyond the sum required to meet initial margin requirements."
Lukken and Terry Duffy, chairman and president of CME Group, also said that the industry will be releasing the conclusions of a study on the feasibility of insurance for futures customers sometime in the summer, which they view as an alternative method to protect customer funds in FCMs if a firm were to fail in the future.
