September Deadline For CCP recognition – FIA Europe

FIA Europe, a derivatives industry trade body, is urging agreement by European Union and United States regulators on mutual recognition of central counterparties (CCPs) next month to avoid a major disruption to trading.

“European recognition of US clearing houses under the European market infrastructure regulation (EMIR) is the biggest immediate issue faced by the derivatives industry,” said Simon Puleston Jones, CEO of FIA Europe.

The Capital Requirements Directive IV (CRD IV) – the legislation which enforces the new Basel III capital adequacy regime in Europe for banks and other financial institutions including market infrastructures – imposes a deadline for recognition and authorization of non-European CCPs of December 15.

But Puleston Jones says the issue needs final resolution in the next month if regulators are to avoid significant disruption to the derivatives markets. “Not only would a large number of buy-side clients of EU clearing brokers need to start looking for new clearing brokers, but the impacted banks would also need to reconsider how they clear their house business and promptly put the necessary arrangements in place.”

The first European clearer authoriZed under EMIR was Nasdaq OMX Clearing in March. If US CCPs are not recognized under EMIR, the cost to European clearing members of clearing derivatives trades on behalf of European clients in the US would sky-rocket because of the extra capital charges they will incur under CRD IV.

“In the absence of EMIR recognition being granted by 15 December, European clearing members may need to hold 150 times more capital to continue to clear on US CCPs than would be the case if recognition were granted,” said Puleston Jones.

For European institutional investors, there is a very real prospect of not being able to clear US business because of constraints on US clearing brokers’ ability to take on additional business.

“Whilst this is potentially a franchise-threatening issue for EU clearing members, it is a mistake to assume that US clearing members are rubbing their hands with glee at the prospect,” added Puleston Jones.

“With the balance sheet constraints imposed by Basel III’s leverage ratio and the broader increase in regulatory capital costs that would result, US clearing members have limited capacity and appetite to take on the risk that would need to be passed on by their European peers.”