US, EU reach equivalency deal on central clearing
OREANDA-NEWS. February 12, 2016. US and EU regulators have reached a long-sought equivalency agreement that will let companies use central clearing on both sides of the Atlantic to meet more stringent financial regulations set to take effect this year.
The US Commodity Futures Trading Commission (CFTC) and the European Commission's financial markets directorate announced the deal today after more than three years of discussions. The deal averts the risk that European companies would be unable to use US clearinghouses to meet EU clearing requirements that could apply to certain trades as soon as 21 February.
The deal "will ensure that our global derivatives markets remain robust, while keeping our financial system as stable and resilient as possible," CFTC chairman Timothy Massad said.
The European Commission under the deal intends to propose a decision that will declare that the CFTC's central clearing requirements are equivalent to the EU's financial rules for clearinghouses. US clearinghouses seeking recognition in the EU will have to confirm they collect enough initial margin to account for a two-day liquidation period. This is more stringent than CFTC regulations requiring enough margin for a one-day liquidation period.
The CFTC at the same time plans to propose that most of EU's requirements are comparable to its clearing regulations. This would allow central clearinghouses already registered in the EU to meet the CFTC's requirements for clearing. The deal is a "significant milestone" in harmonizing regulations and ensuring global markets remain robust, CFTC chairman Timothy Massad said today.
EU financial services commissioner Jonathan Hill called the agreement an "important step forward for global regulatory convergence" that would provide certainty for the marketplace. The agreement does not have set schedule but commits the financial regulators to act as soon as practicable.
The CFTC and European Commission's financial markets directorate said they would work to apply their regulations consistently across clearinghouses registered in the US and the EU. The regulators said they would monitor the potential for "regulatory arbitrate" to prevent companies shifting clearing locations to avoid tougher regulations.
The agreement ends a "regulatory stalemate that should have never come about in the first place," CFTC member Christopher Giancarlo said today. He blamed the dispute an a previous CFTC administration that acted "unilaterally to impose US trading requirements on participants in overseas markets," which he said was rightly viewed by EU regulators as a "massive regulatory overreach."