25 October 2013

FESE: Disparity between US and EU CCP margin standards for exchange‐traded derivatives

FESE notes that on the question of CCP margin standards for exchange‐traded derivatives the Commission and the CFTC admit that this is still 'a key material difference' between the two regimes, but that work is ongoing to reduce that disparity.

While CCPs in the EU will be obliged to require increased margin once authorised under EMIR , the differences in margin charges between the EU and the US under the latest rules are increasingly provoking reaction in the market. FESE is seeing signals already now that when examining the future cost of hedging in the EU end‐users are fully prepared to move their activity to lower‐cost jurisdictions notably the US. While the EMIR requirements are of course about safety rather than cost, there is a balance to be struck particularly where clients, who in the end are the ones who pay the margin, can access risk management products anywhere in the world. Therefore FESE sees it as critical that, while talks continue to harmonise margin standards for exchange‐traded derivatives between the US and the EU, the European Commission also takes appropriate steps to defer the introduction of increased margins within the EU pending international harmonisation, in order to prevent any further erosion in exchange‐traded derivatives business in the EU as a consequence of regulatory arbitrage.

The current regulatory reform agenda for derivatives stems primarily from the G20 Pittsburgh conclusions, which aimed to require the same disciplines of centralised trading and clearing of OTC derivatives as are commonplace in the exchange‐traded derivative markets. Another of the conclusions in Pittsburgh was a commitment on the part of G20 economies to avoid regulatory arbitrage. It may make sense to schedule a progress report at G20 level to ensure the appropriate focus on coordinated derivatives reform, in service of the wider aims of the Russian G20 Presidency of strengthening financial regulation and predictable energy markets (which depend on liquid derivatives exchanges for pricing).

FESE cannot emphasise enough how resolution of the margin issue is critical to the continued competitiveness of EU derivatives exchanges in a global marketplace. Margin to support derivatives positions is paid by companies coming from all major sectors of the EU economy. It is vital that the European authorities take concerted action to close this loophole in global derivative Exchange regulation before these companies take the decision to move their trading interest to other jurisdictions.

Full letter (dated 24.9.13)

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