EU Grants Equivalency to Asia-Pacific Clearing Houses

The European Commission has issued the first set of equivalency rulings, approving clearing houses in four Asia-Pacific countries. However, uncertainty remains for the future of US central counterparties (CCPs).

The EU’s executive body said in a statement on Thursday that the regulatory regimes that oversee clearers in Australia, Hong Kong, Japan, and Singapore were deemed equivalent to EU rules.

With the ruling, clearing houses such as Singapore’s SGX AsiaClear, Australia’s ASX Clear, and Japan’s Securities Clearing Corporation (JSCC), will be able to clear standardized OTC derivatives. It is significant because it allows EU-based banks use these clearers to help them meet new obligations under the European Market Infrastructure Regulation (EMIR).

“Today’s decisions show that the EU is willing to defer to the regulatory frameworks of third countries, if they meet the same objectives as EU rules,” states Michel Barnier, the outgoing European commissioner for internal markets and services.

European banks have been eagerly awaiting decisions on equivalency from the Commission due to the capital requirements in Basel III. Under the rules, banks will benefit from holding lower levels of collateral against trades that are passed through any EU approved clearing house.

It is because of these rules on capital that doubts over the future of US clearinghouses remain unforeseen. If the EU does not grant equivalency to the US, the cost for European banks to clear through US clearinghouses, such as CME Clearing and ICE Clear US, could increase significantly.

The Basel III capital rules come into effect on December 15, which means the EU has just less than two months to grant equivalency to US clearers. EU and US regulators are negotiating a six-month delay for the rules, however many fear this could be announced at the eleventh hour, causing preparations for a worst-case scenario somewhat futile.

“We have been working in parallel on assessing twelve additional jurisdictions and finalizing those assessments is a top priority… we are in close and continued dialogue with our colleagues at both the SEC and CFTC as we develop our assessments of their respective regimes and discuss their approaches to deference,” adds Barnier.