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 market participants.”
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 EMIR.”
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 regulation.
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 Europe.
“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 provide that.”