By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.
In a letter to the CFTC, the European Central Bank said that the objectives of the derivatives provisions of the Dodd-Frank Act of increasing transparency and reducing risk will not be served by applying Title VII of the Act to the swap activities of the ECB or transactions with its counterparties. In fact, said the central bank, regulations constraining the ECB’s activities in the US or with US parties will have the perverse consequence of making it more difficult for the ECB to reduce risk and maintain the integrity of the financial system. Indeed, imposing transparency requirements on the ECB will not achieve greater transparency for the swap market, said the central bank, because the ECB’s trades are not ordinary commercial trades that are comparable with other transactions. If Title VII-implementing regulatory requirements are imposed on foreign central banks, said the ECB, the ECB and other central banks may shift swap activity away from the US markets or US counterparties, thereby reducing the liquidity of US markets, constraining the competitiveness of US parties, and reducing the effectiveness of central bank actions.