In a presentation before a committee of the European Parliament last week, Commodity Futures Trading Commission chairman Timothy Massad argued that US clearinghouses effectively imposed similar margin requirements on their members as European clearinghouses. As a result, he said, the regulation of US clearinghouses should be deemed equivalent to the regulation of EU clearinghouses —at least regarding minimum margin requirements. European banks will be subject to putative capital requirements for exposure to US clearinghouses unless they are deemed to be subject to EU equivalent regulation; a determination is required by June 15, 2015, to avoid such consequence. According to Mr. Massad, although EU clearinghouses are required to use a two-day liquidation period to calculate clearing member margins, such margins are collected on a net (not a gross) basis. However, in the United States, said Mr. Massad, clearing member customer margins are collected on a one-day gross basis, and typically result in a collection of substantially greater total margin by the clearinghouses. In connection with house clearing members, where margin effectively is collected in both the European Union and the United States on a net basis, two-day margin ordinarily is greater than one-day margin, acknowledged Mr. Massad. However, while in the United States, clearing member house accounts include the clearing firm and all affiliates, in the European Union, affiliates are not included in the house environment but are included in the customer environment instead. As a result the difference between the amounts of total margins in house accounts at EU and US clearinghouses is less pronounced than might be expected. Although Mr. Massad did not prevail in his arguments at this time, he and Jonathan Hill, Commissioner for Financial Stability, Financial Services and Capital Markets Union acknowledged “[d]iscussions are constructive and progressing” and “have been mutually satisfactory on the issue of the ability for both sides to potentially defer to each other’s rules.” (Click here for further information in “Further Delays in Transatlantic Clearing Accord” in the May 8, 2015 edition of Corporate & Financial Weekly Digest by Katten Muchin Rosenman.)
My View: Ultimately the CFTC and EC will resolve their current debate regarding whether clearing member margin should be based on a two-day or a one-day liquidation period—given the differences in how margin is collected by US clearinghouses (gross basis) and EU clearinghouses (net basis). But there is another requirement for EU clearinghouses that is not currently mandated for US clearinghouses—that EU clearinghouses dedicate at least 25 percent of their capital requirements as skin in the game in their default waterfalls (ESMA had initially considered requiring 50 percent of clearinghouses’ capital requirement but settled at 25 percent; clickhere to access ESMA’s: “Final Report: Draft Technical Standards under the Regulation (EU) No 648/2012 of the European Parliament on OTC Derivatives, CCPs and Trade Repositories”). When, ultimately, compromises in approach are made to achieve a resolution of the debate whether US clearinghouses are equivalently regulated as EU clearinghouses, it will be interesting to see whether any amendments to approach are adopted in the United States or Europe regarding so-called skin in the game.