Market participants can breathe a sigh of relief as the EU and US regulators have reached a landmark agreement on cross-border supervision of clearing houses.
The agreement between the European Commission and US Commodity Futures and Trading Commission (CFTC) will allow US clearing houses, or central counterparties (CCPs) to continue serving European banks.
The European Commission said on Wednesday it will adopt an equivalency decision in regards to US rules on CCPs.
“It means that European CCPs will be able to do business in the United States more easily and that US CCPs can continue to provide services to EU companies,” said Jonathan Hill, Commissioner for Financial Services, Financial Stability and Capital Markets Union.
“It has taken a long time, but it is good news that after more than three years of discussion, we are now able to provide certainty for the marketplace.”
According to a release from the CFTC, the equivalence ruling is based on the condition that US CCPs collecting initial margin should take into account a two-day liquidation period, that the initial margin models include measures to mitigate the risk of procyclicality, and that they maintain “cover 2” default resources.
The European Commission had until February 21 to grant equivalence to the US, otherwise the cost of doing business between European counterparties and US CCP’s would triple, most likely fracturing the trillion dollar derivatives market.
The first wave of mandatory interest rate clearing in Europe for big banks will take effect in June.