On Aug. 26, the European Securities and Markets Authority opened a consultation on a key element of the regulatory framework for clearinghouses in Europe, a move that could break the logjam with the U.S. on clearinghouse recognition.
A year ago the European Commission granted equivalence determinations for Australia, Hong Kong, Japan and Singapore, which allowed clearinghouses in those countries to obtain recognition in the European Union. Five more countries are set to be approved this fall: Canada, Switzerland, Mexico, South Korea and South Africa. But EU regulators have not been willing to grant an equivalence determination for the U.S., despite months of negotiations, mainly because of differences in EU and U.S. standards for margin methodologies.
ESMA now appears ready to re-examine its position. The discussion paper asks for feedback on Article 26 of regulatory technical standard 153/2013, which establishes the standard for the amount of time used by clearinghouses to transfer or liquidate the positions of a defaulting clearing member. The liquidation period is currently set at a minimum of two days.
In the U.S., the liquidation period is set at a minimum of one day, but U.S. officials have argued that margin requirements in the U.S. are usually higher because margins are collected on a gross basis, versus net in Europe.
ESMA explained that it published the discussion paper because it was asked by the European Commission to consider whether changes to the EU rules may be necessary to avoid the risk of “regulatory arbitrage” with the U.S. ESMA said it is considering whether to allow clearinghouses to use a one-day liquidation period, with the condition that this would apply only to client accounts and that margins would have to be calculated on a gross basis.
In a Sept. 28 speech, ESMA Chairman Steven Maijoor discussed the purpose of the discussion paper. Maijoor explained that ESMA asked for input and data from stakeholders in order to evaluate the opportunity to change the regulatory technical standards, to measure the potential impacts on margin levels, to define the scope of the amendments and to determine if some specific conditions should apply.
If ESMA determines new standards are needed, the next step would be a public consultation on draft technical standards before they are submitted to the European Commission.
ESMA asked for feedback by Sept. 30. In response, FIA Global submitted a letter jointly with the International Swaps and Derivatives Association and the Investment Association. The three trade associations emphasized the importance of establishing standards at the global level and noted that the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions have launched a global assessment of margin methodologies and other clearinghouse standards.
