EU Tensions Mount Over Clearing

Terry Flanagan

Bank of England calls for mandatory clearing of exchange-traded derivatives and cash products.

Tensions are simmering within the European Union over the clearing of derivatives, in particular whether exchange-traded derivatives should be subject to the same mandatory clearing requirements as OTC derivatives.

“The EU must ensure that requirements to clear through CCPs apply also to exchange-traded derivatives and to vital cash markets, not just to ‘standardized’ OTC derivatives,” Paul Tucker, deputy governor for financial stability at the Bank of England, said in a speech Monday at the European Commission’s Conference on European Post-Trading Landscape in Brussels.

“Whatever anyone says, there is really no excuse for where things currently stand in Europe,” he said.

A proposal to extend European Market Infrastructure Regulation (EMIR) to listed derivatives was proposed in April but was not included in the draft that was approved by the Council of the European Union.

Germany has opposed the move to extend regulations to listed derivatives on the grounds that it goes beyond the G20 agreement.

Extending clearing requirements to listed products supported by those who wish to break up what they perceive as anti-competitive ‘vertical silos’ where trading, clearing and settlement all take place under one roof.

The United Kingdom had sought to extend EMIR to cover listed derivatives in addition to OTC, creating an impasse in the Council with some Member States, including the U.K. and France, holding out for EMIR to apply to all derivatives and others, including Germany, taking the position that it should apply only to OTC derivatives.

“The clearing obligation does not apply to exchange-traded investments so there is not a level playing field,” Jacqui Hatfield, partner in the financial services regulation practice at Reed Smith in London, told Markets Media. “The UK tried to fight for a level playing field but lost.”

In May, Mark Hoban, financial secretary to HM Treasury, stated that the new EMIR standards should not be allowed to embed monopolies in clearing and that “vertical silos” must be subject to fair and open access requirements.

Under the EU’s bifurcated approach to derivatives reform, EMIR would apply to OTC derivatives which would be defined as derivatives not executed on a regulated market as defined under MIFID.

Therefore, derivatives transacted on trading platforms governed by MIFID would not be covered by EMIR and would not be subject to mandatory clearing.

Under MIFID II, a greater portion of the derivatives market in Europe will move to regulated markets going forward.  Therefore, based on the current EMIR OTC derivatives definition, those derivatives moving to these regulated markets would escape the EMIR clearing requirement.

At the same time, however, MiFID II will require exchanges that also operate clearinghouses to provide access to their services on a non-discriminatory basis.

“Members states shall not prevent investment firms and market operators operating a multilateral trading facility from entering into appropriate arrangements with a central counterparty or clearing house and a settlement system of another member state with a view to providing for the clearing and/or settlement of some or all trades concluded by market participants under their systems,” according to the MiFID II proposal.

“The MiFID II package provides an opportunity to correct [the situation] next year,” said Tucker. “Those who argue that the gap in the EU’s framework should persist are serious about private gain, but sadly, not about stability. The crisis that threatens to engulf us all illustrates why we should give no room to such sentiments.”

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