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EU challenge US on derivatives market

Friday, June 27 16:29:24

The European Union said it will help build a seamless global market in financial derivatives by accepting rules used in five countries, adding the United States would get the green light too if it showed flexibility.

After the 2007-09 financial crisis in which derivatives like credit default swaps played a key part in creating uncertainty, countries across the world have introduced rules to make the market more transparent and safer.

Market participants like clearing houses, third parties who help complete trades safely, want to avoid the costs of having to comply with multiple jurisdictions as well as their home country rules.

However, rules proposed so far by the EU and U.S. differ in several ways and neither side wants to be seen as backing down in making key changes.

On Friday, the EU's financial services chief Michel Barnier said he would accept that derivatives rules for clearers from Japan, Singapore, Australia, Hong Kong and India are equivalent to the bloc's own rules.

This means that clearing houses or CCPs from these five countries can clear EU derivatives contracts without the added cost of complying with European rules as well.

"Global derivatives markets need worldwide standards and national rules that work together seamlessly," Barnier said in a statement.

Most of the world's $700 trillion derivatives contracts are traded in London and New York, and Barnier said "equivalence" decisions for the United States and other countries should follow shortly.

This would depend on the U.S. derivatives regulator, the Commodity Futures Trading Commission (CFTC) accepting that EU rules are as good as its own, a step it has been wary of taking so far.

"If the CFTC also gives effective equivalence to third country CCPs, deferring to strong and rigorous rules in jurisdictions such as the EU, we will be able to adopt equivalence decisions very soon," Barnier said.

Last year regulators from the EU and United States signed up to the "Path Forward" agreement, a pledge to make their derivatives rules mesh better and avoid fragmenting the sector.

The International Swaps and Derivatives Association or ISDA, a global industry body, has said if the EU does not accept U.S. rules as equivalent, European banks would not be allowed to act as clearing members of any CCP in America.

EU bank capital rules would also stop European lenders from holding less capital to cover exposures to non-equivalent clearing houses.

"Together, these rules could have a devastating impact on the business of any non-equivalent clearing houses," ISDA said in a recent note.

How margin is applied to derivatives contracts is a key difference between EU and U.S. rules but Barnier was "confident" that margin requirements could be aligned to avoid "arbitrage opportunities".

A CFTC commissioner, Scott O'Malia, wrote to Barnier last month, urging him to "proceed with all diligence" to find the U.S. regulatory regime equivalent.

Some European regulators are worried the CFTC will bar non-U.S. clearing houses from taking on U.S. customers, making it harder for the EU to agree to equivalence. (Reuters)