CFTC, EU reach accord on clearinghouse regulation
After years of discussion, the European Commission and the Commodity Futures Trading Commission in February ironed out their differences on the regulation of clearinghouses in the U.S. and Europe. The agreement paves the way for Europe to recognize U.S. clearinghouses and allows European firms to use these clearinghouses in time for the upcoming implementation of mandatory clearing for over-the-counter derivatives.
"This is an important step forward for global regulatory convergence. It means that European CCPs will be able to do business in the United States more easily and that U.S. CCPs can continue to provide services to EU companies," said Jonathan Hill, European Commissioner for Financial Services, Financial Stability and Capital Markets Union. "It has taken a long time, but it is good news that after more than three years of discussion, we are now able to provide certainty for the marketplace."
European Member States signed off on the deal in a Commission expert group meeting of the European Securities Committee on Feb. 24. The European Commission can now move ahead to adopt the decision formally.
The European Commission said that market participants may continue clearing OTC contracts through U.S. CCPs before the June 21 date, even though they have not been recognized yet. This will allow market participants to use U.S. CCPs to meet "front-loading" requirements. In addition, the European Securities and Markets Authority is consulting on the possibility of allowing EU CCPs to apply an alternative standard for client margining that would allow EU CCPs to meet CFTC requirements.
The agreement between the U.S. and EU calls on U.S. clearinghouses to meet certain new requirements, such as shifting to a two-day liquidation period for setting initial margin on clearing member proprietary positions, maintaining "cover-2" default resources and adjusting initial margin models to mitigate pro-cyclicality. The agreement specifies, however, that these conditions will not apply to agricultural derivatives traded and cleared in the U.S.
As part of the accord, the CFTC also agreed to develop a determination of "comparability" that will conclude that a majority of EU requirements are comparable to CFTC requirements. This will provide the basis for EU CCPs to meet certain CFTC requirements under a substituted compliance approach. The CFTC also will develop a streamlined process for EU CCPs to register with the CFTC.
"Our agreement is critical to ensuring that our global derivatives markets remain robust, while keeping our financial system as stable and resilient as possible," said CFTC Chairman Tim Massad. “It is a significant milestone in harmonizing regulation of these markets.”
FIA President and CEO Walt Lukken welcomed the agreement. “The approach agreed by the CFTC and the European Commission reflects the global nature of our industry and the mutual recognition of the industry’s core regulatory jurisdictions to develop a common and unified approach,” Lukken said, adding that FIA encourages regulators to pursue a transparent process in addressing such key developments.
