The turf war among regulators in the U.S. and Europe in the area of clearing of over-the-counter (OTC) derivatives has made central counterparties (CCPs) in those countries nervous about a mid-December deadline to reach regulatory equivalence. Among those CCPs is Chicago-based CME Clearing, which clears a large portion of euro/dollar interest rate swaps, and worries the industry could be impacted if an agreement isn’t reached.
Traders spoke to Suzanne Sprague, executive director of collateral and risk for CME Clearing about the impasse, how to resolve it, and what it means for the clearing market.
Traders: The apparent lack of willingness of regulators in both regions to allow clearing of “foreign” OTC derivatives seems to be a big sticking point-what’s behind this impasse?
Sprague: Regulators and the industry are after the same thing, we want a level playing field across futures and swaps regulation and to avoid market disruption. However, the determination of regulatory equivalence across jurisdictions was supposed to be based on a holistic assessment without a line-by-line comparison of regulations, given the structural differences of markets across the globe.
Traders:How is this playing out?
Sprague:There is a clear imbalance between the U.S. and the [European Union] EU on futures regulation-the [Commodity Futures Trading Commission] CFTC has created an open door for [Foreign Boards of Trade] FBOT markets and deferred primary regulatory oversight to the EU. Conversely, the EU is cherry-picking line item regulations to impose on other jurisdictions without regard to recognizing weaknesses in EU regulations as compared to other jurisdictions.
Traders: We are seeing regulatory arbitrage now due to the lack of trading venue recognition and CCP recognition.U.S. regulations covering the mandatory clearing of OTC derivatives has already gone into effect, while the European regulations won’t come online until 2016-has that caused problems?Sprague:The delay in the EU’s OTC clearing mandate is linked to the EU requirement that all CCPs that want to be qualified to clear OTC-mandated products must re-apply for recognition as a domestic or third-country CCP with [the European Securities and Markets Authority] ESMA, despite the fact that the major CCPs across the globe are already currently registered in the EU as CCPs. This re-application process has consumed a significant amount of time and resources.
Additionally, the EU has directly tied [Qualified CCP] QCCP status to the reauthorization process, while the U.S. has not reciprocated this requirement. This means that a non-US CCP does not have to register with the CFTC to be deemed a QCCP; however a US CCP must be authorized by the EU to be deemed a QCCP.
Traders: Do you think these problems will be resolved before the December deadline for the EU to recognize US CCPs?
Sprague: International pressure on Brussels is building ahead of the current deadline as EU-based banks and investment firms, as well as their non-EU based affiliates, struggle with the uncertainty related to the potential impacts on their business should the U.S. not be deemed equivalent and US CCPs not be deemed QCCPs.
Although there is no clear deal yet, we are working with regulators on both sides of the pond to resolve outstanding differences that will allow CME Inc. to be recognized in Europe and secure QCCP status.
