A senior executive for the European Commission has criticized the lower levels of collateral U.S. regulators are requiring for swaps traded outside of clearing houses, arguing it is “anti-competitive” against Europe.
New rules for uncleared derivatives are set to be finalized next year, which will see banks and swaps dealers forced to post a minimal level of initial and variation margin for their trades.
However, while the margin framework was first introduced in September 2013 by BCBS/IOSCO, a global regulatory body, cross-border harmonization of what the minimal level should be has not occurred.
Speaking at the Global Custody Forum on Wednesday Patrick Pearson, head of financial market infrastructure at the Commission, argued clearing houses, otherwise known as central counterparties (CCPs) do engage in competition, and the fact that U.S. rules are less stringent provides an unfair advantage.
“What do you do if another country has lower margin requirements? It’s not a friendly, idealistic society. People need to make money in this world and in this market CCPs do compete on margin,” says Pearson.
“But when you have an unfair competitive advantage because of regulatory issues… then we see margin discrepancies are so big that our firms are considering moving out of the European Union. So we need to watch that space, and make sure we are in a place that we apply the same rules without anti-competitive issues attached.”
Initial margin requirements are expected to be finalized in April next year and then rolled out in December 2015 under a phased approach until the final wave is captured in 2019.
However, Pearson says market participants from around the world have said they will not be ready to meet the proposed deadline.
The International Swaps and Derivatives Association (ISDA) recently said in a public consultation that the margin requirements should come into force two years after the rules become final.
“The industry is already telling us, and global regulators in Japan and the United States that we just can’t do this from December 1 next year,” he adds.
“That’s something we listen to, if there are serious concerns then it needs to be agreed at a global level, it makes no sense for Europe to steam ahead… and find out Asia Pacific and United States have simply allowed more time to introduce these laws.”
U.S. Margin Levels For Uncleared Swaps “Anti-Competitive”
A senior executive for the European Commission has criticized the lower levels of collateral U.S. regulators are requiring for swaps traded outside of clearing houses, arguing it is “anti-competitive” against Europe.