Regulators are running out of time to agree
on cross-border rules for listed and OTC derivatives clearing and risk damaging
Europe’s financial markets, according to panelists at the International
Derivatives Expo (IDX) 2014.
Speaking at the event in London yesterday,
Kim Taylor, president of CME Clearing, said the clock was ticking to resolve
disagreements among regulators over substituted compliance for third countries.
“We have a situation right now where Europe
is saying US rules on central counterparties (CCPs) aren’t stringent enough,
yet if you actually look at the rules, they offer similar levels of safety,” she
told the IDX audience.
Examples include margin requirements, where
the European Securities and Markets Authority (ESMA) has set a minimum standard
of two-day margin for non-OTC derivatives trades, while the US requires one
day. Taylor argued that the US requirement for firms to hold 220% of the margin
needed in Europe makes the rules equivalent from a safety perspective.
“Substituted compliance should be about
outcomes,” she said, “but each jurisdiction is trying to gold plate their own
rules and this means they are often going well above the need to provide safe
and effective protection for investors and adding significant excess costs for
Margin requirements for the European market
infrastructure regulation (EMIR) are due to be phased in for different products
between 1-15 December this year. Taylor said that unless regulators can agree
on substituted compliance rules, European banks might find themselves unable to
use non-EU products to hedge, increasing both costs and risk.
Paul Swann, president and managing director
of ICE Clear Europe, agreed that regulators were too focused on individual
rules, warning that firms would seek out regulatory arbitrage opportunities.
He added, “What we need to be thinking
about is, how does this affect the end-user? The focus should be on safety and
we need to ensure customers aren’t selecting their location based on which CCPs
are cheapest but provide less safety.”
Hans-Ole Jochumsen, president of global
trading and market services as Nasdaq OMX, said it was up to the industry to
ensure that regulators listened to these concerns.
“We need to push harder for Europe and the
US to come to an agreement on these rules,” he said. “I don’t think it’s
impossible as we already managed to get 28 European member states to agree on
However, Taylor said she remains concerned
there is not enough time to complete the task: “There are CCPs in 30 third
countries looking for equivalence judgments, but this won’t even be looked at
until issues between Europe, the US and Japan have been resolved.”
Regulators on both sides of the Atlantic
have attempted to reconcile differences to facilitate cross-border trading, but
firm agreements substituted compliance have yet to be reached.
In July 2013, the US Commodity Futures
Trading Commission and European commissioner Michel Barnier released the “path
forward” statement, outlining a commitment to work together on derivatives
regulation. Following a meeting between Barnier and acting CFTC chairman Mark
Wetjen, the two affirmed this commitment, with Barnier stating the political
agreement on MiFID II would help accelerate the move towards consistent global
The panel disagreed on the extent to which
segregation of client accounts with CCPs can or should be standardised in
Europe, with some believing clients will always want choice, while others felt
standards will naturally evolve over time.
“EMIR allows a lot of flexibility on
segregated accounts, which provides customers with choices, however I think
standards will begin to emerge when they gravitate to the best solutions, but
it should not be forced,” said Thomas Book, CEO of Eurex Clearing.
However, LCH.Clearnet’s global head of
SwapClear, Daniel Maguire, believes there is no desire for standardisation in
“Stricter standards in the US do have some
benefits, but there’s much more appetite for flexibility in Europe,” he
explained. “We serve a diverse range of customers, from banks to hedge funds or
UCITS, and they each tell us they want something different and we’ll aim to