EU and US aim for May deal on derivatives clearing

The two main regions for derivatives trading aim to harmonise industry rules in the coming weeks, settling a long-running spat between US and European regulators.

A draft deal could be in place by May 7, coinciding with talks in Brussels between Jonathan Hill, the European financial services commissioner, and Timothy Massad, who heads the Commodity Futures Trading Commission, the main regulator of US derivatives, say four people familiar with the matter.

Common recognition of US and European rules for the operation of clearing houses is a keystone of post-financial crisis reforms to derivatives regulation.

Clearing houses stand between investors, banks and hedge funds transacting derivatives and guarantee their trades. The pooling of risk represents the most dramatic change for the industry since the failure of Lehman Brothers and US taxpayer-backed rescue of AIG in 2008.

Brussels has drafted a document, seen by the Financial Times, and shared with national finance ministries to brief them on progress on the talks. The European Commission declined to comment.

The EU is working to harmonise its rules with the US but has previously argued that the CFTC’s approach is less stringent. The worry for Brussels is how US rules favour banks that back clearing houses. In contrast, the EU approach looks for higher capital standards from members of clearing houses such as banks.

Helping drive a deal, both sides have analysed data from two transatlantic clearing houses according to the draft document.

Under the draft deal, the US would accept the EU rules for a two-day liquidation period on net positions of futures contracts for clearing members. That would include US acceptance of EU rules on capital rules to guard against “procyclicality” in stressed markets.

At these times clearers require more margin to back their portfolios, but it is also when traders struggle to find more stable liquid assets. However, it remains a sticking point, say those familiar with the talks.

European rules were also expected to result in more conservative initial margin requirements. The US currently allows a one-day margin period for futures contracts.

The draft document says the US had proposed to permit substituted compliance for EU clearing houses. It would mean EU clearing houses offering services in the US will be able to comply with European rules in place of US rules, as they are required to do.

In return, the EU would change standards to allow a one-day liquidation period on gross positions for customers of clearing members.

European officials have privately warned there is no guarantee of a deal next month, while US officials, led by Mr Massad, have publicly voiced their opposition to significant changes to their rules.

Europe voted on Friday to extend a June deadline if required.

Last month Terry Duffy, executive chairman of CME Group, US’s largest futures exchange, suggested to a House committee that European clearing houses be restricted from US markets if the spat were not soon resolved. Two deadlines for implementation of capital rules in Europe have been put back owing to the dispute.

A deal would also allow European regulators to recognise Intercontinental Exchange, the US derivatives group with extensive operations in Europe, to meet new incoming standards on derivatives regulation.