By Philip Stafford, Financial Times
European markets authorities have called on their US counterparts to recognise equivalent standards for overseas clearing houses and head off a transatlantic regulatory turf war that threatens to fragment the derivatives market.
The European Commission on Friday said it would recognise US rules that oversee clearing houses if the Commodity Futures Trading Commission, the main US derivatives regulator, were similarly flexible for foreign risk management houses.
However the CFTC needed to defer “to strong and rigorous rules in jurisdictions such as the EU,” said Michel Barnier, the EU commissioner in charge of financial services.
The comments came as the commission, the executive arm of the European Union, said on Friday it would recognise the regimes of Japan, Singapore, Australia, Hong Kong and India but would not yet recognise those of the US, the world’s largest market. Authorisation will mean European banks can use local clearing houses for trades but apply European standards to their trades.
The recognition issue between the EU and the US, the two largest derivatives trading blocks, has become a thorny sticking point as both put a different interpretation on a post-crisis G20 mandate.
Policy makers wanted to to push more over-the-counter derivatives on to electronic venues and have them processed through clearing houses. A clearing house stands between to parties in a deal, ensuring the trade is completed if one side defaults.
The two sides have differed on what constitute minimum standards in clearing houses, particularly over the amount of margin, or insurance, that investors have to post for trading.
In a statement, Mr Barnier said talks with the CFTC were “a priority matter.” “I am confident that we can agree on outcomes-based assessments of our rules and on aligning key aspects of margin requirements to avoid arbitrage opportunities,” he said.
Market participants and overseas regulators have warned that a delay to recognition could cause disruption to the international swaps market.
Complicating the issue, Europe has tied its clearing rules to new rules around banking capital ratios. It gives banks incentives for using clearing houses but also makes the EU standards the toughest in the world.
If Europe does not recognise the US rules as equivalent, European banks with exposure to US clearing houses could be forced to raise their capital charges for some deals by up to 30 times.
That would particularly hurt CME Group, the world’s largest futures exchange. It owns and clears the majority of eurodollar-related risk products, which are used by investors to hedge their dollar swap interest rate exposure.
