EU Extends U.S. CCP Equivalency Decision as Tensions Continue

The European Commission is expected to extend a crucial deadline on recognizing the U.S. as equivalent to its own rules on clearing houses until June, however tensions between the authorities continues.

Speaking at a conference in London on Wednesday Patrick Pearson, head of financial market infrastructure at the Commission, confirmed a deadline that would have seen European banks suffer higher capital requirements to do business with U.S central counterparties (CCPs), will be extended from December 15, 2014 to June 15, 2015.

“Very shortly you will expect from the Commission an extension from the capital requirements for bank exposures to CCPs. We have decided to extend that to June 15 of next year,” says Pearson.

Despite the extension of the capital requirements deadline, tensions over clearing rules between the U.S. and EU continue.

To operate in the U.S., European clearing houses have to register with the Commodity Futures Trading Commission (CFTC). Because of this, they have to instead exclusively comply with U.S. rules, causing cross-border conflict.

“The regulators from that country say it has been working well for 20 years, if it’s not broke don’t fix it. We disagree… and we think it doesn’t work. If you look at the agreements to move trades onto clearing platforms, you can see a problem growing,” he adds.

“While you may be only facing four or five dual registered CCPs in that country, I can guarantee you within 48 months that country will have to regulate two or three handfuls of CCPs. To do that they are going to need money and staff, and looking at the budgets of regulators around the world, we are not too sure the money is going to be there to do that job.”

So far, the EU has only recognized Australia, Hong Kong, Japan and Singapore as having clearing rules that are deemed equivalent.

Pearson says the Commission is expected to provide additional equivalency rulings in the coming months for at least 13 countries, which include Canada, Mexico, New Zealand and the U.A.E.

In addition, Pearson also highlights the Commission is set to review the European Markets Infrastructure Regulation (EMIR) next year, in which the phased-in frontloading requirement for OTC derivatives will be significantly revised.

“The challenges aren’t the clearing obligation as such, but around frontloading. The problem the Commission has is that the industry, and European Parliament, have contacted us and told us to put our foot on the break; told us this doesn’t really work,” adds Pearson.

“What we can do is strongly consider a revision to this phase-in period for frontloading trades. We only have 10 days to make this decision, but the pressures from the industry on the costs, getting the systems right, is quite clear throughout the European Parliament. So watch that space. The fact we haven’t adopted that regulatory standard says something.

“We are required by August next year to report to the Parliament our experiences with EMIR and attach any proposals to amend those rules. With reporting, margin, collateral, there are issues there that need to be addressed. We know we didn’t get it right in 2012 but we are willing to have that debate, and if we agree that there is something broke we will fix it.”