The Committee on Capital Markets Regulation, a US-based non-partisan lobby group representing financial firms from all sides of the market, has sent a letter to the European Commission and Commodity Futures Trading Commission, detailing steps that each regulator must take to agree a coordinated approach to prevent disruption to cross-border OTC derivatives trading.
“Unless the European Commission recognises US derivatives clearinghouses before 15 December, EU legislation would effectively require EU banks and EU affiliates of US banks clearing swaps or futures with US clearinghouses to terminate these relationships,” the CCMR says in its letter to Michel Barnier, vice president of the EC, and Timothy Massad, chairman of the CFTC.
“We cannot wait until 14 December. The time for action is now. Derivative contracts hedge risk over several months, so counterparties will soon be unable to roll-over existing contracts,” says Professor Hal Scott, director of the CCMR.
To prevent this from occurring, the EC and the CFTC must recognise each other’s regulatory regime for derivatives clearinghouses as equivalent, he says.
“These regulators have yet to reach an agreement, due to certain differences between EU and US rules. These differences include initial margin for futures, segregation of customer collateral and bankruptcy laws,” Scott says.
Differences between EU and US rules for initial margin for futures have received substantial attention. However, outcomes-based analyses have demonstrated that the US and EU rules result in broadly consistent customer margin levels, the lobby group says.
“Thus, the EC and CFTC need not require line-by-line equivalence for initial margin rules. Such an approach would be consistent with a recommendation by G20 derivatives regulators that substituted compliance for derivatives rules should be based on whether both regimes reach comparable regulatory outcomes.”
The letter notes that as the EU and US account for close to 95% of the $630 trillion global derivatives market, resolving the problem with a coordinated approach “would be a very important step towards implementing the post-financial crisis G20 reforms.”
Both the EC and the CFTC have acknowledged the need to protect the cross-border derivatives market but have made no formal recognition between the EU and US swap rules.