OMAHA (DTN) -- Members of the House Agriculture Committee made it clear Wednesday that Congress and U.S. financial regulators will not cede their authority to the European Union.
Leaders from the futures industry told lawmakers their involvement is needed to help dial back "a regulatory arms race" by European market regulators. As Great Britain and the EU move toward "Brexit," Europe is tightening its regulations on stock and commodity clearinghouses, members of commodity exchanges told lawmakers in a hearing before a House Agriculture Subcommittee on Commodity Exchanges, Energy & Credit.
Terrence Duffy, chairman and CEO of CME Group, told lawmakers the push for a tighter regulatory regime in Europe attempts to claim oversight of clearinghouses such as CME even though only about 5% of CME's trading volume is tied to euro-dominated products. Duffy said it would be against U.S. law for CME to view Europe's authority over the Commodity Futures Tradition Commission. A duplicate regulatory structure also makes it more expensive to do business.
"I don't think anybody can really understand what that is going to do with the ultimate consumers," Duffy said.
Duffy said the EU regime appears as retribution for tighter trading laws implemented by the U.S. after the 2008 market collapse. The Brexit situation added another layer of regulatory demands.
The goal of the European Securities and Market Authority is create a regulatory regime "to displace you and the rest of the United States and take over as the regulator," Duffy said. He added, "The EU is trying to show their dominance throughout this process on the Brexit, and that's part of what this hearing is about, and they are using their leverage with the U.S. against the U.K."
Rep. Michael Conaway, R-Texas, ranking member of the House Agriculture Committee, lashed out at European regulators during the hearing, noting the EU quickly turned away from a 2016 agreement between the U.S. and Europe on regulatory equivalency. Conaway also highlighted comments from an EU regulator who said at a conference last month about the U.S., "You fell for it" when it came to striking a deal with the EU. Conaway said of the comments, "In their worst light, it suggests the U.S. does not have a partner but a competitor in financial market regulation."
The U.S. Commodity Futures Trading Commission had issued a joint statement with the European Commission in March about cross-border regulatory issues. The CFTC on Tuesday voted unanimously to advance a plan that would allow the CFTC to terminate foreign exemptions. The CFTC stated the action "helps ensure there is no misunderstanding among foreign authorities supervising brokers that are dealing directly with customers located in the U.S. regarding their obligations."
Walt Lukken, president and CEO of the Futures Industry Association and a former CFTC chairman, said market and regulatory fragmentation were becoming large enough issues that leaders at the G20 would discuss the economic risks.
"This is a real concern at all levels," Lukken said. "The stakes are incredibly high. Without common ground, we may find ourselves with increased market fragmentation."
Rep. Rick Crawford, R-Ark., said duplicative regulatory regimes in the U.S. and Europe would be one more complication to drive some liquidity out of markets. Crawford said it was difficult enough now for farmers to use hedging tools.
"What we're discussing here today, frankly, we're scaring some liquidity out of the market," Crawford said.
Crawford said the Agriculture Committee often has been told to move farmers to "a market-based support" such as the kind of contracts CME offers. Crawford said farmers are afraid to get into those markets.
"We most definitely need to be incentivizing farmers to use these risk-management tools," Crawford said, adding that making trading tools more complicated would hurt producers.
Rep. Bishop Scott, D-Ga., chairman of the subcommittee, said Congress needs to spring into action. At a minimum, he said, the House Agriculture Committee needs to send a letter and hearing testimony to the European Securities and Markets Authority, "to make sure our financial system, our market participants are not put at a disadvantage on the world stage at this time, or at any time."
Chris Clayton can be reached at Chris.Clayton@dtn.com
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