Market participants will soon be able to use a US approved central counterparty (“CCP”) to clear standardised over-the-counter derivative trades as required by EMIR. This follows a determination by the European Commission, on 15 March 2016, that the US Commodity Futures Trading Commission (“CFTC”) has a regulatory regime for CCPs that is equivalent to that of the EU (the “Determination”). This in turn paves the way for a CFTC-regulated CCP to be recognised by the European Securities and Markets Authority (“ESMA”).
By way of background, a CCP established outside of the EU may provide clearing services to EU clearing members and trading venues where it has been recognised by ESMA in accordance with the conditions set out in Article 25 of EMIR. The primary condition for recognition is that the European Commission must have adopted a positive equivalence decision with regard to the regulatory framework applicable to the CCP in the relevant third country. The European Commission has adopted equivalence decisions for the regulatory regimes for CCPs in Australia, Hong Kong, Japan, Singapore, Canada, Mexico, South Africa, Switzerland and the Republic of Korea. CCPs that have been recognised remain subject to the regulation and supervision of their home jurisdictions, rather than that of the EU.
The Determination follows an announcement, on 10 February 2016, on a common approach of the European Commission and the CFTC to the supervision of EU regulated and CFTC regulated CCPs, which resolved a major and long-standing impasse stemming from a number of differences between the US and EU regulatory regimes. In addition to providing that the EU will propose for adoption an equivalence decision regarding the CFTC’s requirements for CCPs, the common approach provides that the CFTC staff will propose for adoption a determination of comparability concerning EU requirements, which will permit EU CCPs to provide their services in the US while complying primarily with EMIR.
Following the Determination, a CFTC regulated CCP wishing to obtain recognition in the EU must apply to ESMA which will then process the application in cooperation with the CFTC. The applicant CFTC regulated CCP will need to confirm that its internal rules and procedures meet certain conditions relating to the calculation of initial margins and the default fund.
According to ESMA, although it has up to 180 working days to conclude recognition under EMIR, it intends to do everything within its powers to shorten that period to the maximum extent, given the 21 June 2016 deadline for the start of the clearing obligation in the EU.
Aside from conferring the right to provide clearing services to EU clearing members and trading venues, CCPs that have been recognised under the EMIR process will also obtain qualifying CCP status across the EU under the Capital Requirements Regulation 575/2013. This means that EU banks’ exposures to these CCPs will be subject to a lower risk weight in calculating their regulatory capital.
Importantly, the Determination has not addressed US CCPs that are not regulated with the CFTC. CCPs regulated by the US Securities and Exchange Commission continue to face equivalence problems in the EU.