US and Europe break derivatives rules impasse
A common approach to the rules governing central counterparties (CCPs), the key infrastructure for reducing counterparty risk in derivatives trading, have been agreed between Europe and the US.
The European Commission (EC) intends to adopt an equivalence decision with respect to Commodity Futures Trading Commission (CFTC) requirements for US CCPs which will allow the European Securities and Markets Authority (ESMA) to recognise US CCPs “as soon as is practicable”. The proposed determination of equivalence is based on the condition that CFTC-registered US CCPs seeking recognition in the EU confirm that their internal rules and procedures ensure that rules around initial margin – collateral held to protect against the initial value of the contract – are tightened up in line with European rules, particularly for the clearing members themselves.
The conditions will not apply with respect to US agricultural commodity derivatives traded and cleared domestically within the US. Once recognised by ESMA, US CCPs may continue to provide services in the EU whilst complying with CFTC requirements.
The CFTC staff will also propose a determination of comparability with respect to EU requirements, which will permit EU CCPs to provide services to US clearing members and clients whilst complying with certain corresponding EU requirements. This would allow EU CCPs to comply with standards similar to CFTC requirements in this particular area. Such a change would reduce the possibility for regulatory arbitrage across jurisdictions whilst maintaining high regulatory standards.
The CFTC staff will additionally propose to streamline the registration process for EU CCPs wishing to register with them.
Derivatives markets are global in nature. A common approach to their regulation and supervision is critical to supporting cross border activity and maintaining financial stability. Both the CFTC and EU requirements are based on international principles, making their model similar.
The CFTC staff and the European Commission Services report that they will work to ensure that changes are implemented in a coordinated manner, and to monitor the impacts resulting from the sequencing of the changes and assess whether any further actions must be taken to ensure financial stability or prevent regulatory arbitrage.
Reported by Dan Barnes
