Industry participants cheer EU and CFTC equivalency accord
After three years of negotiations and sometimes bitter wrangling, the European Commission and its US counterpart the Commodity Futures Trading Commission (CFTC) finally reached an agreement on a common approach to equivalent recognition of central clearing counterparties (CCPs).
“This is an important step forward for global regulatory convergence,” said Jonathan Hill, European Commissioner for financial stability, financial services and capital markets union in a joint statement. “It means that European clearing houses will be able to do business in the US more easily and that US clearing houses can continue to provide services to EU companies.”
Under the agreement, both sides will adjust their respective rules related to margin, capital collected to offset possible losses if one side of the derivative trade defaults. In essence, the deal entails European policy makers moving closer to the US on rules regarding the amount of margin that clients of banks must post to clearinghouses. See more information via CFTC statement.
Although no timetable was given regarding implementation, the Commission intends to shortly adopt an equivalence decision with respect to CFTC requirements, which will allow the European Securities and Markets Authority (ESMA) to recognise US CCPs as soon as is practicable.
The two sides, which oversee around 90% of the$553 trn derivatives market have been at loggerheads to agree on common standards. The lack of a deal would have been especially problematic for Europe, where the bloc’s own regulations would have meant banks and other financial firms faced dramatic rises in their use of margin for US clearing houses such as CME Clearing.
MiFID delayed
Industry participants also welcomed the news that the European Union had proposed delaying MiFID II by yet another year to 2018 due to the technical challenges of implementing the new rules.
The legislation—whose wide scope ranges from regulating commodity derivatives trading to unbundling and boosting transparency rules for bond trading—had originally been set for 2016 but late last year was pushed forward to 3 January 2017. The regulator now believes that extra time is needed for the regulators and the industry to upgrade their IT systems to become fit for purpose.
According to the European Commission’s press release the “exceptional technical implementation challenges” faced by financial firms and the complex infrastructure that must be set up to comply with the new rules have deemed an extension of the start date by one year necessary.
The rule book, which has more than 1,000 pages of technical standards alone, will be more onerous than the US Dodd-Frank Act. ESMA has to collect data from about 300 trading venues on about 15 million financial instruments from regulators and trading venues, the commission said. However, ESMA found that neither financial services firms nor regulators would have the systems in place needed to implement the planned rules by the 2017 start date.
This comes as no surprise to banks and other financial organisations which sounded the warning bell months ago that the deadline was too tight for them to design and build the systems needed to comply with some of the measures, especially for non-equity markets.
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