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18 February 2015

Traders Magazine: What's causing the delays in new OTC derivatives rules?


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The 18-month stalemate between regulators in the US and EU continues to hobble clearing operations in the OTC derivatives market, raising costs and risk for buyside firms and increasing concentration levels among remaining CCPs.


Virginie O'Shea of Aite Group reveals the cause of these delays.

According to O'Shea there are rumors circulating around the European Commission that an agreement between the EU and the US is imminent—though these have been false hopes before. “It is hoped that they will agree by the end of this month on whether or not European firms will be subject to both European and US requirements, which are materially different in terms of reporting and clearing requirements, or some degree of equivalence can be reached. Both sides have their own threats—the EU rules currently require European customers to hold extra capital when using US clearing houses for derivatives trades, and the US rules mean that EU clearers and other firms will have to dual report and register.”

O'Shea continues: “Overall, the delays to EMIR requirements has held back business for clearing brokers and CCPs in Europe—some brokers have even exited the business as a result of the delays, such as BNY Mellon and Royal Bank of Scotland. So there are concerns about concentration risk for the limited number of clearing brokers still on the market. This whole “skin in the game” for CCPs proposal is also contentious because CCPs are essentially being made into lenders of last resort for financial institutions by having to contribute their own capital to default funds. I expect that topic to be much discussed over the next few months, as well as the need for a minimum level of risk management across clearers.”

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