* Giancarlo says supervision works for foreign clearers
* Giancarlo wants changes to global leverage ratio add-on
* Says add-on ratio is damaging markets
(Adds call for banking rule change)
By Huw Jones
LONDON, May 10 The European Union should think
carefully before forcing through any changes to where clearing
of euro-denominated securities like derivatives and bonds is
located after Brexit, the top U.S. derivatives regulator said on
Brussels is looking at whether euro-denominated clearing, an
activity dominated by London, should be moved to the single
currency area after Britain leaves the bloc in 2019.
Christopher Giancarlo, acting chairman of the U.S. Commodity
Futures Trading Commission, told the annual conference of global
derivatives industry body ISDA that he was respectful of the
fact that "this is an important regulatory policy decision that
needs to be made with care by European officials."
The issue is politically sensitive at a time when Britain
and the EU embark on divorce talks, with legislative proposals
on clearing due from Brussels next month.
Giancarlo also drew attention to the European Commission's
consideration of a less radical option than moving clearing from
London, which would involve tighter supervision of foreign
clearing houses that handle large amounts of euro clearing.
A clearing house or central counterparty (CCP) stands
between two sides of a trade, ensuring its completion even if
one side goes bust.
The CFTC has a lot of experience in the supervision of
clearing houses both in the United States and abroad, Giancarlo
"We welcome the opportunity to discuss the CFTC's experience
with officials in Europe."
"To date, the US has not deemed a body of water – even as
large as the Atlantic Ocean – as an impediment to effective CCP
supervision and examination," he said.
He also said that given the closeness of the U.S. and
European derivatives markets, what Europe decided "undoubtedly
will inform the evolution of U.S. regulatory policy for
cross-border swaps clearing."
Giancarlo called for changes to the "supplemental" leverage
ratio, or SLR, that the world's top banks must comply with.
The SLR, designed by global regulators, is based on a
"flawed understanding" of how clearing works and harmed market
liquidity, he said. A leverage ratio is a measure of capital to
a bank's assets on a non-risk weighted basis.
Giancarlo said the SLR should not include cash posted by
bank's customers to back trades, and changes could contribute to
a big saving in capital costs for banks, and potentially a
three-fold increase in trading activity.
It was critical that global regulators check if rules
introduced since the 2007-09 financial crisis have made the
financial system effective in supporting growth, he said.
"Flourishing capital markets are the answer to global
economic woes, not diminished trading and risk transfer."
(Editing by Jane Merriman and Alexander Smith)