US and EU Ink Substitute Compliance Deal
After three year of intense negotiations, the U.S. Commodity Futures Trading Commission and the European Commission have struck an agreement on substitute compliance for central counterparty clearinghouses.
“This approach, once fully implemented, will permit U.S. and European CCPs to continue providing clearing services to entities in each other’s jurisdiction,” said CFTC Chairman Timothy Massad. “Doing so will ensure that our global derivatives markets remain robust, while keeping our financial system as stable and resilient as possible.”
Under the terms of the deal, the European Commission will adopt an equivalence decision that will recognize CFTC-regulated CCPs after the EU’s European Securities Committee approves the proposal that will allow the European Securities and Markets Authority to recognize the U.S. CCPs.
Once the European Commission issues its decision, which will be “as soon as is practical”, it will designate those U.S. CCPs as qualifying CCPs for the purpose of the EU’s Capital Requirement Regulations.
The U.S. CCPs that are seeking EU recognition must demonstrate that their internal rules and procedures ensure the clearing of members’ proprietary positions in exchange-traded derivatives, their initial margin models include measures to mitigate ‘procyclicality’, and that they maintain “cover 2” default resources.
These obligations will not apply to US agricultural commodity derivatives that are cleared by CFTC-registered CCPs domestically in the US.
For the EU market participants that wish to satisfy their EMIR central clearing requirement by using a currently not recognized US CCP, they may do so until June 21, when the first phase of the clearing requirement begins. This also includes contracts concluded on or after February 21 that are subject to the EU’s front-loading obligation.
While on the other side of the Atlantic, CFTC staff similarly will propose a determination of comparability with respect to the EU requirements, which will let EU CCPs provide their services to US clearing members and clients while maintaining their compliance with EU regulations.
Additionally, CFTC staff will also propose a streamline registration process for those EU CCPs that wish to register with the U.S. regulator.
The regulators further announced that they will monitor the new transatlantic operating environment for signs of regulatory arbitrage and, if discovered, address it appropriately.
“It has taken a long time, but it is good news,” said Jonathan Hill, Commissioner for Financial Services with the European Commission. “We are now able to provide certainty for the marketplace.”
The news was met constructively by U.S. CCP operators.
“The IntercontinentalExchange welcomes today’s announcement from the European Commission and the Commodity Futures Trading Commission on a common approach for CCPs and acknowledges the extensive cross border efforts of regulators to achieve this significant milestone,” said Jeffrey Sprecher, CEO of ICE.
The CME Group is also pleased that the regulators have reached an agreement that recognizes US and EU clearinghouse regulations as equivalent, according to a corporate spokesperson. “We commend CFTC Chairman Timothy Massad and EC’s financial services chief Jonathan Hill for their efforts to resolve this important issues and prevent market disruptions, particularly through the front-loading process, which begins February 21.”
“This agreement is a significant milestone and we welcome the announcement from the European Commission and the CFTC providing further clarity over clearing house equivalence,” said a LCH.Clearnet Group spokesperson.
Featured image by C
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.