28 June 2014

Financial Times: Europe calls on US to recognise overseas clearing rules

European markets authorities have called on their US counterparts to recognise equivalent standards for overseas clearing houses and head off a transatlantic regulatory turf war that threatens to fragment the derivatives market.

The European Commission said it would recognise US rules that oversee clearing houses if the Commodity Futures Trading Commission, the main US derivatives regulator, were similarly flexible for foreign risk management houses. However the CFTC needed to defer “to strong and rigorous rules in jurisdictions such as the EU,” said Michel Barnier, the EU commissioner in charge of financial services. The comments came as the Commission, the executive arm of the EU, said it would recognise the regimes of Japan, Singapore, Australia, Hong Kong and India but would not yet recognise those of the US, the world’s largest market. Authorisation will mean European banks can use local clearing houses for trades but apply European standards to their trades.

Policy makers wanted to to push more over-the-counter derivatives on to electronic venues and have them processed through clearing houses. A clearing house stands between to parties in a deal, ensuring the trade is completed if one side defaults. The two sides have differed on what constitute minimum standards in clearing houses, particularly over the amount of margin, or insurance, that investors have to post for trading. In a statement, Mr Barnier said talks with the CFTC were “a priority matter.” “I am confident that we can agree on outcomes-based assessments of our rules and on aligning key aspects of margin requirements to avoid arbitrage opportunities,” he said.

Market participants and overseas regulators have warned that a delay to recognition could cause disruption to the international swaps market.

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