Equivalence Becoming Urgent

Shanny Basar

Market participants warned that US and European Union entities may not be able to transact certain derivatives in January if there is no decision on the equivalence of trading venues before new regulations come into force.

Emma Dwyer, partner at law firm Allen & Overy, spoke on a panel on cross-border harmonisation at the ISDA Annual Europe Conference in London today. She said: “If there is not an equivalence decision before the start of MiFID II, then EU and US entities subject to the trading obligation will not be able to transact with one another except on a venue that is authorised by both jurisdictions.”

The MiFID II regulations covering financial markets in the European Union come into force on January 3 next year and require certain derivatives to be traded by EU entities on MiFID II authorised venues. If there is no equivalence decision, US entities may not be able to trade on EU venues and vice versa. The European Commission has said it is aiming to announce an equivalence decision with the US in January.

Dr Kay Swinburne, vice chair of the economics and monetary affairs committee at the European Parliament, said on the panel that the Commission has a target for an equivalence decision in November but the decision is likely to be made at the end of this year.

Tracey Wingate, senior special counsel, international affairs at the Commodity Futures Trading Commission, the US regulator, was also on the panel. She said the downside is so tremendous that a political decision will be made before the end of this year.

Wingate added: “It is like a game of chicken with two cars driving forwards towards each other and one swerves at the last minute.”

Dwyer continued: “If there is no decision then the car crash will be very damaging in terms of the impact on liquidity.”

The poll found that 52% of the attendees expect an equivalence decision in 2018, after the start of MiFID II.

Another area where market participants have been asking for regulatory harmonization is over the supervision of clearing houses. This issue has become more contentious since the UK voted to leave the European Union last year as the bulk of EU clearing is through LCH, the central counterparty owned by the London Stock Exchange Group.

Patrick Pearson, head of unit, financial markets infrastructure, DG FISMA at the European Commission, said in a speech at the ISDA conference that the rules for regulating CCPs from third countries with access to EU markets are not fit for purpose.

“There are 28 offshore CCPs with access to EU markets and we have inefficient, or no, tools to monitor their activities,” he added.

In June the European Commission proposed stricter supervision of central counterparties and also did not rule forcing Euro clearing to relocate from London after Brexit. The Commission suggested a new “two tier” system for classifying third-country CCPs. Non-systemically important CCPs will continue to be able to operate under the existing Emir equivalence framework but Tier 2 systemically important CCPs will be subject to stricter requirements. These requirements include providing the European Securities and Markets Authority with all relevant information and to enable on-site inspection.

“A limited number of CCPs may be of such systemic importance that the requirements are deemed insufficient to mitigate the potential risks,” added the Commission. “In such instances, the Commission, upon request by Esma and in agreement with the relevant central bank can decide that a CCP will only be able to provide services in the Union if it establishes itself in the EU.”

Pearson stressed that increasing Esma’s supervisory role allows the regulator to take a pan-European approach, make quicker decisions and ensure consistency.

“The Commission will only decide on relocation as a last resort,” he added. “Discussions are moving very fast and there will be an announcement before the end of this year.”

He also noted that the proposal has a consultation period and needs to be approved by EU Parliament and EU Council of Ministers where positive changes are likely to be made. Pearson said: “I am confident we will reach convergence as we have deep partnerships with regulators around the world.”

Anuja Verna, director, EMEA financial market infrastructure/payment systems, risk management at Citigroup , said at the conference that the bank supported enhanced CCP supervision but relocation should only be a last resort.

She said: “Relocation will only cause fragmentation, an increase in costs and basis risk and less robust CCPs within the EU. There have been calculations that margin costs will rise between 16% and 24%.”

Swinburne continued that she was not comfortable with Esma having a central role in supervising CCPs. “Local protectionist measures have no place in a modern, global free market,” she added.

The CFTC’s Wingate said joint international supervision of CCPs is already in place. She gave the example of LCH being jointly supervised by Bank of England and CFTC due to the volume of US dollar clearing through the UK CCP.

The poll found that 73% of the audience believe that joint supervision between the UK and EU of important CCPs would meet regulatory objectives.




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