CCP Equivalence Standoff Becoming a ‘High-Stakes Game of Chicken’

Impatience is growing within the derivatives industry as US and European regulators continue to stall on reaching an agreement to recognize each others clearing regimes.
By Editorial
Impatience is growing within the derivatives industry as U.S. and European regulators continue to stall on reaching an agreement to recognize each others clearing regimes.

The transatlantic dispute is risking significant disruption to the derivatives markets as the uncertainty of the situation leaves participants in limbo.

Walt Lukken, chairman of the Futures Industry Association described the stalemate as a ‘high-stakes game of chicken’ at the trade body’s Chicago Expo, where the topic was highly disputed.

The Capital Requirements Directive IV (CRD IV), which enforces the new Basel III capital adequacy regime in Europe, imposes a deadline for recognition and authorization of non-European central counterparties (CCPs) of 15 December. If an agreement is not reached by that date, capital charges will skyrocket for participants clearing through non-recognized CCPs.

The chairman of the Commodity Futures Trading Commission (CFTC), Timothy Massad, said this week that the European Commission has agreed to delay the looming deadline of 15 December, though there has been no word from its European counterparts.

“If the date is moving we need to know that,” said Sunil Cutinho, senior managing director and president of CME clearing. CME is the main clearing house in the U.S. set to be affected by a lack of equivalence.

The European Commission granted four countries recognition last week – Australia, Hong Kong, Japan and Singapore.

“From the recent recognition, it is clear the equivalence has nothing to do with risk concerns,” said Cutinho.

Kim Taylor, president, global operations, technology and risk, CME Group added that it was ‘interesting’ that jurisdictions ‘have the same risk system as the U.S.’.

Reports in October indicated that the European Commission was considering delaying the December date dubbed frequently as the ‘doomsday scenario’, however the regulator looks set to wait until the 11th hour to grant the six month extension.

Massad said his focus has been primarily on resolving the issues with Europe since taking on the role in June.

“Their law, EMIR, requires not only that our rules governing our clearing houses meet international standards – which they do – but also that our laws have an effective system of recognition for clearinghouses located in Europe.

“We continue in dialogue with the Europeans to facilitate their recognition of our clearing houses. And, we have agreed to consider changes that would further harmonize our rules with European rules governing these clearing houses. This would in turn facilitate their recognition of our US clearing houses.”

A European firm trading through a US clearing house with the increased capital charges would be an unviable option.

“You can argue it is all equivalent, but you are a victim of rules which have not been well designed,” said Thomas Book, CEO of Eurex Clearing.

“You have heard for years from regulators that they would focus on global consistency but the outcome is that it is not consistent. I am strong supporter of the European regime but it is not in line with other international standards.”