European regulators are formally considering allowing a US-style clearing regime in an effort to harmonise global derivatives rules and end a longstanding dispute with American officials.
The European Securities and Markets Authority is consulting the market about formally amending legislation agreed more than three years ago, according to a document posted on the regulator’s website on Monday.
The regulator is proposing allowing customers to use a shortened formal liquidation period for margin used in futures trading if it is put into a new type of highly protected account.
If approved by other regulatory bodies, the move would bring Europe closer to the US and help end a long-running and public dispute with the US Commodity Futures Trading Commission.
The two bodies oversee the two largest markets for derivatives trading, which account for 90 per cent of the $700tn notional market for swaps and futures.
However, the US will also have to amend its clearing house rules to get formal agreement between both sides, a person familiar with the talks said.
The dispute has centred around clearing houses, institutions that act as trade counterparties. In recent months, the US and Europe have been focusing on differences between each regime’s requirements for initial margin — collateral posted on a trade to cover losses should a counterparty default.
Each side has argued that their rules better guard against systemic risk while leaving enough for the banks’ own trades.
The European system had created standards for initial margin on futures trading to be calculated using a minimum two-day holding period, compared with just one for the US.
However, Europe has accepted that under its system, clients of European clearing houses will always be required to post 41 per cent more initial margins than what they would be required to post in their US counterparts “if not changed”.
That has led to concerns that local banks and asset managers could be severely penalised by doing business in each other’s jurisdictions.
To overcome the longstanding impasse, Esma is proposing inserting an amendment in European regulations that allows for a special account known as an “Omnibus Segregated Account”. That would allow customers to operate under a one-day liquidation period.
Pauline Ashall, derivatives partner at Linklaters, a law firm, pointed out that the one-day rule would only apply if the industry was prepared to shift from its standard accounts, and clients of clearing members would be willing to meet intraday margin calls.
“So it remains to be seen whether the rule change will actually lead to a change in practice in the EU,” she said.
The alternative, Esma said, was to do nothing, but warned that “a loss of market shares for EU central counterparties is to be feared”.
An agreement would allow Europe to recognise the US as having equivalent rules to oversee clearing houses. Brussels has already recognised nine regimes around the world.
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