MFA Asks for Clearing Harmonization
The Managed Funds Association, which represents the global alternative investment industry, has asked Europe to recognise central counterparties from other regions before introducing mandatory clearing.
From next year the new European Market Infrastructure Regulation will require central clearing of certain over-the-counter derivatives in the region, similar to the Dodd Frank regulation in the US.
The MFA responded to the consultation paper on Emir clearing of interest rate swaps from the European Securities and Markets Authority, the regulator for the region. The trade body said it supported a thoughtful approach to central clearing that ensures that only appropriate products are subject to the requirement.
“One critical, outstanding issue is that it is necessary for derivatives regulatory reforms in the EU and other jurisdictions to permit access to, and competition among, CCPS,” added the MFA. “In particular, it is important that EU and non-EU regulators or policy makers, as applicable, recognise CCPs organised outside their jurisdiction (i.e third party CCPs) in due course.”
The trade body said that many entities subject to Emir also trade derivatives with counterparties subject to other jurisdictions, such as the US Commodity Futures and Trading Commission, so regulations need to be harmonised or the market will become fragmented.
Last month The International Swaps and Derivatives Association, the trade body for over-the-counter derivatives markets, warned that the market was already becoming fragmented as European dealers have been choosing not to trade with US dealers since swap execution facilities were introduced in the US.
Electronic trading platforms for swaps that provide access to US persons have been required to register as SEFs with US regulators and comply with new rules since October last year. On February 15 this year the first OTC interest rate swaps and credit index instruments became mandated for trading on SEFs.
The Isda report in July said: “Trading between US persons and non-US persons has declined. Most notably, fragmentation is disrupting the market for euro interest rate swaps as liquidity pools have become more exclusive among European dealers.”
Michel Barnier, the former European Commissioner for internal market and services, had previously said that US CCPs would not be among the first to be authorised by Esma.
Last week CCP Austria became the eleventh European CCP to receive Emir authorisation. Amongst the approved CCPs are CME Clearing Europe, based in the UK, and Nasdaq OMX Clearing in Stockholm.
The MFA also requested that Esma eliminates frontloading, the application of the clearing obligation to existing contracts, and that it harmonizes the types of interest rate swaps that will be subject to mandatory clearing with the CFTC.
Phase 5 of the uncleared margin rules (UMR) took effect from September 2021.
Temporary equivalence is set to expire on June 30 2022.
IRS trading volumes have fragmented without an equivalence agreement.
Phase 5 of the uncleared margin rules came into effect on 1 September.
Triparty repos can be executed across U.S. Treasury securities to central clearing.