Inclusion of Financial Services in TTIP Negotiations
As a result of continuing challenges to economic growth, the European Union (EU) and the United States (US) have agreed to launch negotiations for a Transatlantic Trade and Investment Partnership (TTIP), which if successful, would result in the biggest trade deal since the World Trade Organization (WTO) was founded 20 years ago. Over and above its potential economic value, there is common understanding that the deal represents a unique opportunity for the EU and the US to work together to define future global rules and standards. TTIP also presents an opportunity for the EU and the US to rebuild trust in each other’s financial regulatory systems, opening the doors to cohesive financial reform without the risks that arise from fragmented regulation.
Negotiations on an agreement between the US and EU started at the beginning of the year, with the first formal round of negotiations to commence the week of July 8. One of the hot topics surrounding the TTIP negotiations is the financial services industry. Particularly, EU officials have pressed for inclusion of financial services regulations to be part of TTIP. Indeed, the final text of the EU’s mandate for TTIP negotiations states, “with regard to financial services, negotiations should also aim at common frameworks for prudential cooperation.”
In contrast, the Obama Administration appears hesitant to include financial services in TTIP, and US officials have instead stated that they hope the issue will be addressed in parallel to TTIP. However, the Administration continues to receive pressure from Congress and the EU to include financial services. On June 26, for example, the House Ways and Means Committee Members Erik Paulsen (R-MN) and Richard Neal (D-MA) circulated a letter regarding the importance of financial services discussions in TTIP. Additionally, four senior Republicans in the House, including Financial Services Committee Chairman Jeb Hensarling (R-TX), recently argued for the inclusion of financial services in TTIP.
Content of Financial Services Discussions in TTIP
During the negotiations – commencing on July 8, the Office of the US Trade Representative (USTR) will lead the discussions, which will be divided into approximately 20 groups and subgroups. If the financial services industry is included as a discussion group, USTR and the Department of Treasury will lead such discussions. There will be several issues that the EU and the US will want to address related to financial services regulatory harmonization in areas such as the cross-border application of rules for swaps transactions, risk management requirements, enhanced prudential standards for certain systemically important institutions, and clearing and reporting requirements.
Financial services discussions in TTIP will be essential in ensuring that the global regulatory framework for the industry is implemented fairly and equally in the EU and the US Such discussions will also be important in avoiding risk fragmentation and improving regulatory cohesion for the EU and the US. As Commodity Futures Trading Commission (CFTC) Commissioner Mark Wetjen stated in a recent International Derivatives Expo, “The plain truth is that risk associated with derivatives is mobile and can migrate rapidly across borders in modern financial markets. An equally plain truth is that any efforts to monitor and manage global systemic risk therefore must be global in nature. Yet another plain truth is that prudential regulation has taken into account the foregoing for decades. It alone has not always prevented risk-management failures and the resulting threats to the stability of the financial system.”
While some argue that US derivatives regulation will put US companies at a disadvantage, some European authorities note that some EU regulations are stricter. EU regulations require financial companies of all sizes to clear their derivatives trades and report them to trade repositories, without an exemption for foreign-exchange transactions. There are also differences between the US and EU capital standards for clearing houses and pre- and post- trade transparency obligations. Further, as the deadline for the CFTC’s cross-border guidance approaches on July 12, US regulators are receiving substantial pressure from Congress and the industry to delay implementation until there is better coordination on the guidance with the Securities and Exchange Commission (SEC) and foreign regulators.
Having a Seat AT the Table to Discuss Financial Services Issues During the TTIP Negotiations
After July 8, the next scheduled rounds of negotiations are in October and December. USTR has announced a stakeholder briefing open to the public on July 10 in order to learn about the US industry’s views on the TTIP. Meanwhile, both chambers of Congress have been hosting hearings on TTIP-related issues. Congress has influence on TTIP issues particularly because, once the TTIP agreement is finalized, it will have to be enacted into law by Congress.
Thus, there is still some uncertainty in terms of the specific details of a potential financial services discussion within the TTIP negotiations. This uncertainty presents a unique opportunity for the private sector to get a seat at the table and voice its concerns and ideas regarding the proper global interpretation of US and EU financial regulations and the effect of Dodd-Frank rules beyond US borders. Moreover, the TTIP negotiations open a new possibility for discussion and resolving important issues such as:
Harmonizing systemically important bank and insurance designations and enhanced prudential standards for such designated companies;
Harmonizing resolution protocols for systemically important financial institutions;
Creating regulatory coherence on definitional rules for swaps, security-based swaps, dealers, and major participants;
Creating regulatory coherence with regard to mandatory clearing and trade reporting;
Eliminating data fragmentation that may result from the indemnification requirement for foreign regulators when accessing information from US-based swap data repositories;
Ensuring a level playing field in the treatment of foreign and domestic trade execution facilities; and
Avoiding discriminatory treatment for foreign insurers and reinsurers in the US and EU.