Business leaders press case for EU-US swaps rules coordination

Out-Law News | 01 Sep 2014 | 12:44 pm | 1 min. read

A US-based lobby group whose members include some of the most well-known names in finance, investment, business and law, is calling for regulators in the US and the European Union to coordinate their approach to new rules governing the swaps market.

The Committee on Capital Markets Regulation (CCMR), a non-partisan group, issued the call in a letter sent to the chair of the Commodity Futures Trading Commission (CFTC), Timothy Massad and the EU’s commissioner for internal market and services Michel Barnier.

In the letter, the CCMR set out steps that it believes regulators must take before 15 December 2014, “in order to avoid disrupting the $630 trillion derivatives market and substantially increasing the cost of hedging financial and commodity risks for US and EU entities”.

The letter said unless the European Commission recognises US derivatives clearinghouses before 15 December, legislation stemming from the Basel III agreement, Capital Requirements Directive IV and Capital Requirements Regulation, “will subject all futures and swaps cleared by European banks and the EU affiliates of [UD] banks with a US central counterparty clearing house (CCP) to a capital charge up to 62.5 times higher than the current requirement”.

According to the letter “this would force these entities to terminate relationships with US CCPs for all cleared derivatives activity and direct their swaps and futures to EU CCPs... this 15 December deadline is a fixed legislative deadline that cannot be extended any further”.

CCMR director Hal Scott said: “We cannot wait until 14 December. The time for action is now. Derivative contracts hedge risk over several months, so counterparties will soon be unable to roll-over existing contracts.”

To prevent this from occurring, the CCMR said the European Commission and the CFTC “must recognise each other’s regulatory regime for derivatives clearinghouses as equivalent”. The CCMR said the regulators had yet to reach an agreement, “due to certain differences between EU and US rules”. These differences include initial margin for futures, segregation of customer collateral and bankruptcy laws, the CCMR said.

Scott said: “If the steps set forth in the letter are taken, then EU-US clearinghouse recognition is possible, without any undue risk to financial stability. There is no need for an extremely costly disruption of the global derivatives market.”

According to the CCMR, one issue that has received “substantial attention” is differences between EU and US rules for initial margin for futures. “However, outcomes-based analyses have demonstrated that the US and EU rules result in broadly consistent customer margin levels,” the CCMR said. “The European Commission and CFTC need not require line-by-line equivalence for initial margin rules. Such an approach would be consistent with a recommendation by G20 derivatives regulators that substituted compliance for derivatives rules should be based on whether both regimes reach comparable regulatory outcomes.”