FIA Welcomes US-EU Accord on CCP Equivalence

FIA has issued the following statement from FIA President and CEO Walt Lukken regarding the joint announcement by European Commissioner Jonathan Hill and CFTC Chairman Tim Massad that they have agreed on a “common approach” to the regulation of clearinghouses in the U.S. and Europe.

 

“FIA welcomes the much-anticipated announcement of a common approach to equivalent recognition of CCPs between the U.S. and Europe and congratulates Chairman Massad and Commissioner Hill on resolving this critical issue. This will ensure that the outstanding concern of equivalence will be resolved ahead of the start of the mandatory clearing obligation in Europe in June, and brings to an end a period of uncertainty for market participants and infrastructures as they seek to meet new regulatory requirements.

 

“The approach agreed by CFTC and the European Commission reflects the global nature of our industry and the mutual recognition of the industry’s core regulatory jurisdictions to develop a common and unified approach. FIA supports the IOSCO principles in this area and believes that a flexible, outcomes-based approach to similar processes in the future will avoid a recurrence of protracted negotiations. FIA encourages regulators to pursue a transparent process in addressing such key developments and supports constructive and open consultation with industry.”

 

Background

 

The European Commission and the CFTC today announced an agreement on clearinghouse requirements that will pave the way for European regulators to grant equivalence to U.S. clearinghouses. According to the announcement, the European Commission will propose the adoption of an equivalence decision, which will need to be approved by the Member States of the European Union. That vote is expected on Feb. 24.

 

The European Commission said it expects that U.S. CCPs will be recognized by June 21, the date when the mandatory clearing obligation for interest rate swaps starts to take effect. The European Commission also said that market participants may continue clearing these contracts through U.S. CCPs before this date even though they have not been recognized yet. This will allow market participants to use U.S. CCPs for the frontloading of mandatory cleared IRS. In addition, the European Securities and Markets Authority is consulting on the possibility of allowing EU CCPs to apply an alternative standard for client margining that would allow EU CCPs to meet CFTC requirements.

 

The announcement added that equivalence will depend on U.S. clearinghouses meeting certain new requirements. These include: shifting to a two-day liquidation period for setting initial margin on clearing member proprietary positions; maintaining “cover-2” default resources, and adjusting IM models to mitigate pro-cyclicality. The agreement specifies, however, that these conditions will not apply to agricultural derivatives traded and cleared in the U.S.

 

The CFTC also agreed to develop a determination of “comparability” that will conclude that a majority of EU requirements are comparable to CFTC requirements. This will provide the basis for EU CCPs to meet certain CFTC requirements under a substituted compliance approach. The CFTC also will develop a streamlined process for EU CCPs to register with the CFTC.