Excerpts from Chairman Heath Tarbert’s Op-ed with the Bank of England's Jon Cunliffe on the CFTC-BoE MOU for Supervision of Cross-Border Clearing Organizations

“The financial relationship between the United States and United Kingdom is a hugely important one. The UK is the single largest investor in the US – UK firms invested more than $560 billion in the region in 2018 – while the US is the largest investor in the UK, with firms investing more than $750 billion in the UK market in that same year.

“In particular, the relationship is important in derivatives markets, where the UK and US dominate global average daily turnover for over-the-counter interest rate derivatives. In April 2019, the UK had an average daily turnover of $3.7 trillion. The US figure was $2.4 trillion. Together, they account for more than 80% of the global market share.

“Today, the Commodity Futures Trading Commission and the Bank of England – the main regulators of these markets – have signed a new agreement on supervisory co-operation in derivatives markets, which further reinforces their close relationship.

“Ten years ago, in the wake of the financial crisis, the US and UK were leading actors in the overhaul of the global regulatory framework. A crucial change was that key derivatives such as interest rate swaps should be run and risk-managed through central counterparties. By replacing the under-collateralised and opaque web of bilateral trades that had caused such damage in the crisis, we increased the protection against counterparty credit risk, enabled the efficient netting of positions and enhanced our visibility over the network of derivatives transactions.

“The use of clearing – and particularly clearing across borders – has grown rapidly since then. US and UK central counterparties now clear hundreds of trillions of dollars in derivatives transactions every year. The ties between the US and UK have grown with it so much that it is not a stretch to say there exists a special regulatory relationship in financial services that is tangible in its own right.

“The long-lasting significance of these reforms was seen when the Covid-19 pandemic sent shockwaves through the world’s financial markets earlier this year. The largest dollar moves in history were recorded for the S&P 500, Dow Industrial Average and Nasdaq-100. The FTSE All-Share index fell more than 10% on March 12.

“Despite this market turmoil and a transition to a work-from-home model, the central counterparties at the heart of this activity remained resilient. As with all real market stress events, there will be lessons to learn about how to improve the system.

“As regulators for the largest derivatives markets in the world, we are committing to continuing to co-operate based on a shared understanding. The agreement forged between the US and UK today therefore marks an important moment in the furthering of this co-operation.

“The agreement entrenches a number of key principles: the central counterparty’s home country is the primary supervisor; the supervision of central counterparties that operate in both the US and UK is based on close co-operation and mutual respect; and in emergency situations, the home authority will take the lead in any response.

“Through the agreement, as leading global infrastructure regulators, we have embraced that philosophy and put in place the institutional structures for years of co-operative engagement. It champions the goal of mutual deference as set out in G20 commitments, and enshrines the understanding between us that the home country authority is accountable in its jurisdiction for the resilience of central counterparties under its supervision.”

Read the full op-ed here.