The European Commissioner for Financial Stability, Financial Services and Capital Markets Union, Jonathan Hill, and United States Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad have announced a common approach regarding requirements for central clearing counterparties (CCPs).
The common approach
Following this agreement the Commission intends to adopt shortly an equivalence decision with respect to CFTC requirements for US CCPs which will allow ESMA to recognise US CCPs as soon as is practicable. Once recognised by ESMA, US CCPs may continue to provide services in the EU whilst complying with CFTC requirements. CFTC staff will propose a determination of comparability with respect to EU requirements, which will permit EU CCPs to provide services to US clearing members and clients whilst complying with certain corresponding EU requirements. CFTC staff will also propose to streamline the registration process for EU CCPs wishing to register with them.
Two key elements of the common approach are EU equivalence and CFTC substituted compliance.
Key elements of the approach to EU equivalence are:
- the proposed determination of equivalence is based on the condition that CFTC-registered US CCPs seeking recognition in the EU confirm that their internal rules and procedures ensure: (i) for clearing members’ proprietary positions in exchange traded derivatives, the collection of initial margins that are sufficient to take into account a two day liquidation period; (ii) that initial margin models include measures to mitigate the risk of procyclicality; and (iii) the maintenance of ‘cover 2’ default resources; and
- the Commission will shortly propose the adoption of an equivalence decision under EMIR to determine that US trading venues are equivalent to regulated markets in the EU. This will make a difference to non-financial counterparties’ calculations against thresholds.
CFTC substituted compliance
As regards CFTC substituted compliance, CFTC staff will propose a determination of comparability concluding that a majority of EU requirements are comparable to CFTC requirements. This determination will provide a basis for both EU CCPs already registered with the CFTC as derivatives clearing organisations and those seeking registration to meet certain CFTC requirements by complying with the corresponding requirements as set forth in EMIR. In addition, CFTC staff will propose to streamline the registration process for EU CCPs wishing to register with it, reflecting these similar requirements. This process will be completed within the same timeframe as the process for EU equivalence and recognition of CFTC-registered US CCPs.
The steps required to implement the common approach will be put into place as soon as practicable.
CFTC staff and the Commission Services will continue to cooperate closely to ensure that the agreed approach is applied consistently and continues to be appropriate with respect to CFTC-registered US CCPs and EU CCPs. Moreover, they will monitor any potential regulatory arbitrage between CFTC-registered US CCPs and EU CCPs.
ESMA has also issued a statement welcoming the common approach announced by the Commission and the CFTC. One the equivalence decisions by the Commission on the US regime for CFTC – supervised CCPs is adopted, ESMA will resume the recognition process of specified US CCPs that had applied to ESMA to be recognised in the EU. ESMA notes that whilst EMIR gives it up to 180 working days to conclude that recognition, it intends to do everything within its powers to shorten that period to the maximum extent and proceed with recognition as soon as the US applicant CCPs meet the conditions contained in those equivalence decisions.
Given the deadline of 21 June 2016 for the start of the clearing obligation in the EU, ESMA recognises that US CCPs will have a strong interest in becoming fully compliant with the EU equivalence conditions in order to be eligible to fulfil the EU clearing obligation requirements which should help in shortening that period. However, ESMA cannot commit to any specific dates for the recognition decisions, given that such decisions mainly depend on the compliance by CCP applicants.
ESMA will also consider as a matter of priority the next steps on its consultation on the amendment to its Regulatory Technical Standard regarding the minimum period of risk for different types of clearing accounts in EU CCPs.
It looks like the EU is going to accept that CFTC regulated CCPs are equivalent to EU CCPs subject to a few conditions. When this happens, US CCPs will be able to become recognised under EMIR and will then be qualifying CCPs for the purposes of the EU capital requirements. The market has been waiting for this for a long time.
The Commission will shortly propose the adoption of an equivalence decision under EMIR to determine that US trading venues are equivalent to regulated markets in the EU, providing a level playing field between EU and US trading venues for the purposes of the MIFID I framework. If this comes about, it would mean that derivatives traded on US exchanges will no longer count as over-the-counter for the purposes of EMIR, which will make a big difference for firms trading on them, especially non-financial counterparties which currently have to count them towards their clearing thresholds.
These plans to make it easier for an EU CCP to become regulated as a derivatives clearing organisation or DCO, which is a US regulated CCP.
View ESMA resumes US CCP recognition process following EU-US agreement, 10 February 2016