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08 May 2014

Risk.net/Maijoor: EU-US segregation clash 'not a simple issue'


The chairman of ESMA, Steven Maijoor, says regulators are facing a 'conflict of law' as they try to resolve issues arising from differing transatlantic regulations on the protection of client collateral.

In the US, banks can only offer an approach known as legal segregation with operational commingling (Lsoc), while the European Market Infrastructure Regulation (EMIR) requires two types of accounts, neither of which matches Lsoc precisely. "Under EMIR, individually segregated accounts are offered on top of the omnibus accounts clearing members traditionally use. But the reason the US cannot have a segregated solution in place is because of their bankruptcy law", Maijoor says. "We have always worked with US and European regulators to find a compromise on this but it's not a simple issue. It's a clear-cut case of a conflict of law between Dodd-Frank and EMIR."

In an omnibus account, collateral is pooled with that of a clearing member's other clients, allowing for more netting and lower collateral requirements – but exposing clients to the risk that their assets could be used to cure the default of another firm within the account. Individually segregated accounts mean client assets are held separately from each other, as well as from the assets of the clearing member.

US bankruptcy law is part of the problem. Even if banks offered physical segregation and clients were willing to pay for it, the law requires loss-sharing among customers of a futures commission merchant, meaning all client assets have to be pooled, including those held in individual segregated accounts. "We need to co-ordinate that. It's not easy, though, since the rules on segregated accounts appear in the Level 1 text of EMIR. We are working very hard on these issues but we don't have a timeline in mind", Maijoor says.

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