REGULATION

London should brace for tough clearing equivalence conditions

CFTC’s Timothy Massad outlines the challenges the UK faces ahead of clearing equivalence negotiations after Brexit.

By Hayley McDowell hayley.mcdowell@strategic-i.com January 11, 2017 2:21 PM GMT

Timothy Massad has predicted the European Union will apply tougher conditions than for other countries when negotiating with London over clearinghouse equivalence.

The outgoing chairman at the US Commodity Futures Trading Commission (CFTC) addressed the London School of Economics this week and drew similarities to the US’s negotiations with the EU.

“When the CFTC was in negotiations with the EU over clearinghouse equivalence, I felt the EU applied tougher conditions [to the US] than what were being applied to other countries,” he said.

Massad explained the tough conditions were reflective of the relative importance of the US market to the EU.

“The London market is of course even more important to the EU, so it would not surprise me if the UK faced a similar situation,” he added.

The equivalence process will not begin until after the UK exits the EU and should the UK fail to gain clearinghouse equivalence, European firms would face higher capital charges for transactions cleared in the UK.

Massad said moving the clearing of euro-denominated products from London to continental Europe - as many European leaders have called for - would have negative effects for investors.

“It would limit the efficiencies that investors otherwise obtain by managing euro-denominated transactions with the rest of their portfolios. This could raise costs for businesses transacting in such products,” he explained.

Massad is due to step down from his role as chairman of the CFTC after serving for two and a half years, when President Obama leaves office later in January.

During his time as CFTC chairman, Massad finalised several key aspects of Dodd-Frank around swaps execution and clearing, and establishing a cross-border framework for derivatives regulation with Europe.