The 18-month-long stalemate between regulators in the US and the European Union (EU) continues to hobble clearing operations in the over-the-counter (OTC) derivatives market, raising costs and risk for buyside firms and increasing concentration levels among remaining central counterparties (CCPs).
Traders spoke with Virginie O’Shea, senior analyst at Aite Group, and asked her what the dangers were and when-or if-the market can expect a resolution.
Traders: This dispute, which has its roots in a regulatory turf war, has dragged on much longer than expected. Are they still arguing about the same things? Is there an end in sight?
Virginie OShea: It is the same set of issues being debated. They have been fixated on those for some time. Now, there are rumors circulating around the European Commission that an agreement between the EU and the US is imminent-though these have been false hopes before. It is hoped that they will agree by the end of this month on whether or not European firms will be subject to both European and US requirements, which are materially different in terms of reporting and clearing requirements, or some degree of equivalence can be reached.
Both sides have their own threats-the EU rules currently require European customers to hold extra capital when using US clearing houses for derivatives trades, and the US rules mean that EU clearers and other firms will have to dual report and register.
Given that they have been arguing back and forth about the extraterritoriality issue for more than 18 months now, with little progress and a whole number of excuses raised for this lack of progress-for example, the passing of the torch from [former Commodity Futures Trading Commission (CFTC) head Gary Gensler] to [current CFTC head Timothy] Massad-its possible that the political wrangling will continue into the coming months.
Traders: This ongoing debate has forced some delay in rules, like this summers decision by the EU to delay a portion of its European Market Infrastructure Regulation (EMIR) plan that required European buyside firms to submit to mandatory clearing of derivative products until 2016. Has that caused problems?
OShea: Overall, the delays to EMIR requirements has held back business for clearing brokers and CCPs in Europe-some brokers have even exited the business as a result of the delays, such as BNY Mellon and Royal Bank of Scotland. So there are concerns about concentration risk for the limited number of clearing brokers still on the market.
This whole skin in the game for CCPs proposal is also contentious because CCPs are essentially being made into lenders of last resort for financial institutions by having to contribute their own capital to default funds. I expect that topic to be much discussed over the next few months, as well as the need for a minimum level of risk management across clearers.