After three years of discussions, the Commodity Futures Trading Commission and the European Commission agreed on a framework to recognize that the other continent’s clearinghouses (CCPs) are subject to equivalent regulatory oversight. This is especially important for US CCPs. Without such a determination, a US clearinghouse could not be deemed a “qualifying CCP” under EU law and European banks carrying positions there would be subject to penalty capital charges. As part of the agreement, US clearinghouses seeking recognition in the EU will have to demonstrate compliance with certain new requirements that today are not typically required for all US CCPs, if any at all. Among other things, US clearinghouses must evidence that (1) for clearing members proprietary positions in exchange-trade derivatives, they collect initial margins sufficient to cover a two-day liquidation process; (2) their initial margin models have measures to mitigate the likelihood that in times of market stress initial margin requirements will increase from more stable times (i.e., procyclicality); and (3) they have sufficient resources to cover the default of the two members with the largest exposure to them. However, the requirement for US clearinghouses to collect initial margins sufficient to cover a two-day liquidation process would not apply to domestically traded agriculture derivatives. Under the framework, the CFTC will also make a determination that EU clearinghouses are subject to equivalent oversight. This will permit EU CCPs already registered with the CFTC as derivative clearing organizations, as well as those applying for registration, to meet certain CFTC requirements by complying with corresponding EU requirements. Once the EC finalizes its equivalence determination, the European Securities and Markets Authority anticipates “rapidly” resuming the recognition process for specific US clearinghouses that have previously applied for recognition.
My View: The resolution of the debate between the European Commission and the Commodity Futures Trading Commission over the equivalency of regulation of clearinghouses has taken far too long. However, both Jonathan Hill, the EC Commissioner for Financial Stability, Financial Services and Capital Markets Union, and Timothy Massad, CFTC Chairman, must be credited for finally ending this too drawn-out ordeal. As J. Christopher Giancarlo, another CFTC Commissioner recently wrote, the discord “was triggered by the previous CFTC administration acting unilaterally to impose US-trading requirements on participants in overseas markets and on non-US participants in American markets. …European regulators rightly viewed these requirements as a massive regulatory overreach.” It can only be hoped that this new accord will be a harbinger of greater coordination and cooperation between the EC and the CFTC built on respect and reliance for comparable if not equivalent regulation in different jurisdictions. Safe and liquid global markets will not exist if each global regulator seeks to impose its rules not only on transactions within its borders, but on extraterritorial transactions too.