New CFTC Commissioner J. Christopher Giancarlo used the occasion of a derivatives industry conference in Geneva, Switzerland to plea for better cooperation among international regulators in implementing over-the-counter derivatives clearing and trading mandates initially proposed at a G-20 summit in Pittsburgh, Pennsylvania in 2009.
Invoking the damaging consequences of the US unilaterally implementing trade protection measures following the US stock market crash of 1929—through passage of the Smoot-Hawley Tariff Act of 1930—Mr. Giancarlo argued against unilateral action by regulators—including the CFTC—that could lead to “[a] trade war over swaps market clearing and execution that will be harmful for the US.” He claimed such a trade war would also hurt Europe.
According to Mr. Giancarlo, Smoot-Hawley was enacted at the time to help the US manufacturing and agricultural sector. However, he claimed, promoters of the law failed to give adequate consideration to the international reaction to unilateral US action:
Smoot-Hawley was interpreted as a declaration of trade war at a critical time in the world economy. Smoot-Hawley made the US a special target of discriminatory trade retaliation from some of the US’ largest and most important trade partners. It led other countries to form preferential trading blocs that discriminated against the United States, diverting world trade and delaying economic recovery on both sides of the Atlantic.
Mr. Giancarlo acknowledged that Smoot-Hawley and international reaction did not cause what ultimately came to be known as the Great Depression, but “it made it worse.”
The new commissioner identified the failure of European regulators to recognize US clearinghouses as “qualifying ” and US imposition of trading rules on non-US execution forums doing business with US persons “contrary to common practice in global markets” as evidence of uncoordinated regulation that has already contributed to global market fragmentation. (If European regulators do not recognize US clearinghouses as qualifying by December 15, European-based banks will face prohibitive capital charges when conducting business through such entities.)
Citing some recent signs of progress between the CFTC and European Commission leadership for “a sound and practical basis for regulatory and supervisory cooperation,” Mr. Giancarlo urged, most immediately, for a resolution of the impasse over the status of US clearinghouses:
I sincerely hope that we can fulfill the important goals that the G-20 set for us in Pittsburgh and avoid falling into a misguided global trade war over regulation of derivative financial products. A global economy that is just starting to show signs of recovering from the “Great Recession” cannot bear the reduction in trade and fragmented financial markets that is a looming possibility.