Ambitious plans for an EU-US free-trade agreement may be put in jeopardy by Washington's failure to finalise a deal coordinating rules in the €460 trillion derivatives market, the EU's financial markets chief has warned.
The US Commodity Futures Trading Commission (CFTC) agreed in July this year on a common position with the European Commission and other global regulators that aimed to iron out differences in how they police derivatives trading worldwide.
But in the months since that agreement was struck in principle, the parties have failed to sign off on the details of the arrangement. The CFTC, under pressure to adhere to Dodd-Frank legislation, has pushed ahead with enforcing its own, tough rules without waiting to coordinate.
Michel Barnier, the Frenchman in charge of European financial regulation, said he hoped to conclude an agreement with CFTC Chairman Gary Gensler in the months ahead, potentially before Gensler steps down at the end of the year.
But he warned the current lack of clarity was starting to cause problems in financial markets, with liquidity in the derivatives industry breaking up and transaction costs rising.
Without agreement on a common approach, including mutual recognition of each other's rules, it would be difficult to move ahead with the EU-US free-trade negotiations, which Europe expects to incorporate financial regulation, Barnier said.
"In the medium-term, it is a bad signal for the Transatlantic Trade and Investment Partnership," he told Reuters in an interview, using the formal name of the free-trade talks.
"I hope all elements of the derivatives agreement from July can be implemented right away," he said, adding: "The TTIP negotiations will be difficult enough without also adding on top of it the financial services' issue."
Europe and the United States launched negotiations on a free-trade agreement earlier this year. Europe hopes that the deal will include financial regulation and markets-related activity, especially as the EU and US account for 80% of global financial transactions. But there are doubts on the US side about whether financial regulation can be incorporated.
Without an agreement on derivatives, regulators fear a "Balkanization" of the market and the likelihood that more transactions will be done outside of exchanges, undermining the transparency that the rules – first set out by G20 leaders at a meeting in Pittsburg in 2009 – were supposed to achieve.
Gensler, who has been criticised by some members of the CFTC board for taking an overly rigid line, is expected to step down in the coming months. Asked whether a change at the top might open the way for breakthrough with the EU, Barnier demurred.
"I have a very good personal relationship with Gary Gensler," he said. "It's true that I sometimes get a little impatient, but I've never expressed my frustration.
"We're going to need another couple of months to find a solution, provided there is the will to find a solution on both sides," he said.
While Europe is keen to fold as many finance issues into the free-trade negotiations as possible, the US is more reluctant. The multitude of powerful regulatory bodies in the United States, from the CFTC to the Securities and Exchange Commission, not to mention the Treasury, make it more complicated.
Barnier linked the timeframe to the end-of-year deadline the German and French governments set last week for reaching an agreement with the Obama administration on a 'no-spying' pact, following the revelations of widespread US eavesdropping.
As with the need for a better understanding among allies on what is acceptable in the world of espionage, Barnier said progress on financial regulation would only be achieved once there was more trust between the parties.
"We have to realise that there is a serious problem of confidence here," he said, referring to the deterioration in transatlantic relations in the wake of the spying scandal.
"The fact there are new revelations almost every week clearly makes the situation worse and worse. It's absolutely urgent that we re-establish confidence."
EU leaders, who met in Brussels last week for talks that were dominated by how to respond to the allegations of US spying, have made clear they do not want to call off or stall the free-trade talks, which were launched in July.
But they do want to put the United States on watch that Europe expects to be treated as an equal partner when it comes to sensitive negotiations, whether over the sharing of data or the application of complex derivatives rules.
Barnier, a former French foreign minister, described himself as a "big advocate" for the free-trade deal, the most ambitious piece of legislation the EU and US have ever attempted.
But he said it wouldn't be complete without incorporating financial regulation, and doing that depended on reaching an agreement on derivatives rules, as well as on resolving problems with how European banks are treated in the United States.
"First you need to agree on the regulatory side before you can agree on extending access (to one another's markets)," he said. "My wish is to put the whole financial services sector into TTIP. Not only financial regulation but the financial markets side. Ultimately those two have to go together."