A research group focused on market regulation has appealed to US and European policymakers to harmonise clearing house authorisation in new global swaps rules to avoid market inefficiencies.
The Committee on Capital Markets Regulation sent a letter to European Securities and Markets Authority (ESMA), the European Commission and the Commodity Futures Trading Commission (CFTC) calling for a more streamlined approach to clearing house authorisation, required under new rules in the European markets infrastructure regulation (EMIR) and the Dodd-Frank Act.
The letter recommends dual registration or foreign recognition of clearing houses under ESMA and CFTC rules so that market participants do not have to register in both jurisdictions or post separate margin payments for each set of exposures.
The committee added the CFTC should extend its temporary exemption for foreign branches of US banks from the ‘US person’ definition until extraterritorial issues have been resolved.
In their current form, the CFTC rules dictate that trades conducted between a US firm and foreign firm must be cleared through a CFTC-certified clearing house, while EMIR requires trades between EU-based firms and overseas entities to be cleared through a central counterparty authorised by ESMA.
“If these differences are not resolved and foreign recognition proves infeasible, then EMIR should be revised to permit US clearing houses to register and comply with the more stringent requirements of either regime,” the letter read.
The ESMA guidelines, which detail how trades should be cleared and collateralised under EMIR, are expected to be finalised by 19 February. Once agreed upon, central counterparties in Europe will have to be authorised by ESMA.
In the US, mandatory swaps clearing will begin on 11 March for some interest rate swaps and credit default swaps for those classified as swaps dealers and major swap participants as defined under the new regime.
The major differences between the two regimes revolve around how much collateral a clearing house must hold, and provisions in case a clearing member defaults.
Under EMIR, clearing houses should use their own resources before the default fund its customers contribute to – rules the CFTC regime does not have. The ESMA rules also include portfolio margining restrictions, while the CFTC require clearing houses to collect more than 100% of initial margin for speculative swaps.