Regulators in the US and Europe have ended a stalemate over the cross-border recognition of each other’s frameworks for the clearing of over-the-counter derivatives.
(UPDATES with additional comments)
The agreement, which was announced today for a ‘common approach for transatlantic central counterparties’, comes just months before the date for mandatory clearing of standardised derivatives in the EU kicks off on June 21.
Without an agreement, European companies would have been cut off or would have to re-negotiate clearing arrangements in order to continue clearing trades with US clearinghouses – and vice versa for US companies operating at EU clearinghouses.
“This approach, once fully implemented, will permit US and European CCPs to continue providing clearing services to entities in each other’s jurisdiction,” CFTC Chairman Timothy Massad said in a statement.
“Doing so will ensure that our global derivatives markets remain robust, while keeping our financial system as stable and resilient as possible. Additionally, it is a significant milestone in harmonizing regulation of our derivatives markets.”
The European Commission had extended a deadline that would have cut off EU and US derivatives participants from one another three times in the past. Some participants had begun to give up hope, even though the two sides pledged to find a common ground.
At issue were slight differences in the margin calculations for cleared swaps. EU rules require margin to be calculated on a two-day net basis while US rules calculate on a one-day gross basis.
The agreement will be implemented over the next several months and will involve the EC adopting an equivalence decision with respect to CFTC requirements – and the CFTC proposing a determination of comparability with EU requirements.
“This is a crucial and long overdue confirmation, even if it is not quite the end,” said Damian Carolan, partner at Allen & Overy. “ It should allow the industry to get on with the reality of mandatory clearing obligations without the shadow of a transatlantic divide in infrastructure access.”
The implementation of the agreement could still turn some heads as it appears to imply that EU and US CCPs will have to make at least some changes in order to achieve equivalence or substituted compliance.
The fact that the two sides were not able to reach an outright agreement on recognising each other’s margin frameworks – which they had for years until very recently – illustrates the accord may not be as congenial as it appears at first glance.
“It is interesting that it does not appear to be full mutual recognition by the CFTC of the EU regulatory scheme. Under this agreement, the EU authorities will recognise US CCPs that comply with CFTC requirements, subject to three conditions specified in the agreement, but not vice-versa,” said Julian Hammar, of counsel at Morrison & Foerster and a former CFTC attorney.
“The CFTC will make a determination of substituted compliance with a “majority” of EU requirements and streamline the registration process to take that into account. The CFTC will continue to impose its view in the minority of areas where it has not made a substituted compliance determination. It will be worth watching what those minority areas are.”
