The EC and the Commodity Futures Trading Commission in the US had reached an agreement on clearing in principle in February 2016, but this is the first concrete move to enable US clearing houses to be used by EU trading firms.
Clearing houses, also known as central counterparties or CCPs, act as the middlemen in derivatives trades. Their job is to assume the risk that either party to a trade will default, and guarantee that it completes in that event.
Their use has been greatly expanded following a 2009 G20 mandate that all standardised derivative trades should be centrally cleared, reported and traded on an electronic exchange where appropriate. Firms had traded derivatives between each other largely on an over-the-counter basis, an arrangement that caused concern after the failure of Lehman Brothers in 2008 left banks scrambling to cover their potential losses on trades with the firm.
European Commissioner Jonathan Hill hailed it as “an important step forward for global regulatory convergence”, and added that the EU will “look forward to the CFTC’s forthcoming decision on substituted compliance”.
The two sides had been arguing over each other’s rules for years, particularly about how much collateral must be held at clearing houses to cover a trade in the event that one side defaults. The EU had mandated that two days’ worth of collateral should be held, while the US argued that one was sufficient.
The impasse was broken in December when the European Securities and Markets Authorityissued a consultation to European firms on whether to change this in December.
Traders had been concerned that an agreement would not be in place to allow them to use US CCPs by June 2016, when the clearing of interest-rate derivatives is due to begin in Europe. The lack of an equivalence decision would have meant substantially higher capital charges under provisions in the Capital Requirements Directive IV.
Esma will now begin processing applications from US CCPs for equivalent status. The regulator has said in the past that it was aware of pressure from the June clearing deadline, and that it would work as fast as possible to process applications. It did warn that it cannot commit to a deadline itself, however.
There are still hurdles to overcome. The CFTC must issue its own procedures for recognising EU CCPs used by US traders, which will cover broadly the same areas as the EC decision.
There is also no agreement between the Securities and Exchange Commission, which regulates equity markets in the US, and the EC, although this is seen as less of a concern than securing equivalence between derivatives regulators.