US And Germany Spar Over Clearing

Shanny Basar

US and German regulators argued over how third-country central counterparties houses should be supervised as the clearing of euro derivatives may have to change after the UK leaves the European Union.

The European Union has proposed that systematically important clearing houses that clear euro derivatives have to be located in the trading bloc after the departure of the UK. The Brexit unit of The Institute of Economic Affairs has estimated that three quarters of euro clearing takes place in LCH, the London Stock Exchange Group’s CCP.

Jochen Metzger, director general payments and settlement systems at Germany’s Bundesbank, spoke on a panel at the FIA IDX conference in London today.

Metzger said the regulation of third-country CCPs has to be proportionate.

“However LCH is so huge and important that we need to err on the side of caution,” he added. “If we get it wrong, then the consequences are enormous.”

Brian Bussey  ‎director, division of clearing and risk at the Commodity Futures Trading Commission also spoke on the panel and said the US oversees 16 CCPs, including overseas clearers.

He said data from the end of 2016 showed that 50% of initial margin came from firms with a US parent in SwapClear, LCH’s swap clearing business, with just 25% from the European Union.

Bussey continued: “So the US has more interest in LCH than anyone else in the world.”

The CFTC regulates LCH in partnership with the Bank of England, the UK central bank.

David Bailey, executive director for financial markets infrastructure at the Bank of England, said on the panel: “The CFTC does not place additional US rules on LCH as effective cooperation is in place.”

Jochen Metzger, Bundesbank

However Metzger countered that he was sceptical on regulatory cooperation.

“It is wonderful in fair weather but not in a crisis,” he argued. “What are the rules for recovery and resolution for clearing members ?”

Bussey argued that he had lived through the financial crisis in 2008 with the CFTC when AIG collapsed and the insurer’s derivatives portfolio had to be unbound.

“I have had practical real world experience,” he said. “You need others regulators to act in good faith and deciding who is the lead supervisor is crucial.”

Bailey continued that clear decision-making procedures need to be put in place before a crisis. “We worked through the collapse of Lehman Brothers and MF Global with the CFTC,” he said.

Fiona van Echelpoel, head of oversight division in the directorate general market infrastructure and payments (DG-MIP) of the European Central Bank said the bank supports ongoing supervision of third country CCPs.

She said: “We need cooperation on an ongoing basis so we can identify issues in advance and have the whole picture in a crisis.”

Van Echelpoel added that the ECB needs the flexibility to act in exceptional circumstances.

Bussey said the Federal Reserve partners with the CFTC for supervision of clearers under the Dodd-Frank Act.

However Metzger said: “Partnership is not good enough as LCH is systemic.”

Metzger continued that one solution for market participants is to use additional clearers. Eurex Clearing, Deutsche Börse’s CCP, launched a partnership program with interest rate swap dealers last year and said there has been a very significant increase in clearing volumes this year. The notional outstanding has reached more than €5 trillion and the Dutch state treasury said it had decided to centrally clear euro interest rate swaps in Frankfurt. There are currently 27 banks in the Eurex partnership program.

Jeffrey Tessler, Clearstream

Jeffrey Tessler, member of the executive board of Deutsche Börse, said at a conference last month that US regulators will not support a forced relocation of euro clearing but will not have a problem with changes that are led by market participants. “The CFTC have no problem with a market-led solution,” he said.

Christopher Giancarlo, chairman of the US Commodity Futures Trading Commission, said in a speech in last month that there needs to be greater harmonization of cross-border regulation for clearing houses.

Giancarlo said: “My concern lies with parts of the EU proposal that would subject U.S. CCPs to overlapping EU regulation and supervision without due deference to CFTC regulation and supervision – due deference that was already agreed to between the EU and the United States in the 2016 common approach for transatlantic CCPs.  We spent three years working on that agreement and remain committed to it.  We do not want to renegotiate it.”

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