Verena Ross, Executive Director of the European Securities and Markets Authority, urged the Commodity Futures Trading Commission to reconsider its position on margin requirements for house accounts of clearing members at clearinghouses (CCPs) in order to help break the impasse over whether US oversight of CCPs is equivalent to European oversight. She made this suggestion during a speech at last week’s IDX 2015 conference in London. The EC does not currently recognize US clearinghouses as subject to equivalent oversight. This could potentially require European banks to take onerous capital charges to maintain positions through US CCPs. Under the European regime, CCPs collect net margin from clearing members for both their house and customer positions calculated on the basis that it takes at least two days to liquidate positions. In the United States, margin is collected on a one-day gross basis for customer positions, but effectively on a one-day net basis for house positions. However, house positions in the United States include affiliated accounts, while in Europe they only include positions of the clearing member firm. According to Ms. Ross, “it was a pure (lucky) coincidence” that when Lehman Brothers defaulted in 2008, the Chicago Mercantile Exchange default fund was not detrimentally impacted because “the margins collected by CME on Lehman’s own account position were insufficient to close the positions without losses in 3 asset classes out of 5.” Separately, Ms. Ross indicated that ESMA is currently working on finalizing “the world’s most ambitious and comprehensive position limits regime [for commodity derivatives] to date.” She suggested that the scope of the European regime compared to the US regime “is vast.” Whereas the United States is proposing limits on 28 core physical contracts, in the European Union, said Ms. Ross, “we are talking about thousands of contracts.” Traders would be obligated to aggregate positions traded on any EU venue with over-the-counter derivatives that are deemed “economically equivalent.” Spot month limits would generally be based on 25 percent of deliverable supply, while other months’ limits would be based on open interest. Ms. Ross indicated that ESMA is also working on finalizing requirements regarding a trading obligation for derivatives subject to a clearing obligation.
My View: Recent public comments by CFTC Chairman Timothy Massad and Jonathan Hill, European Union Commissioner for Financial Stability, and the extension by the European Commission of the effective date of potentially onerous capital charges for European banks clearing US clearinghouses until December 15, 2015, seemed to suggest that cooler heads were prevailing in the debate over whose margin system was better. In fact, a possible consensus appeared to be developing that both the EC and US margin regimes provided equivalent protections. Hopefully, Ms. Ross’s comments do not suggest that the European Commission now requires the United States to show that its margin regime is precisely identical or tougher than that in the European Union in order for US clearinghouses to be deemed subject to equivalent oversight as EU clearinghouses. This should not be a competition!
Compliance Weeds: Firms that may be impacted by European position limits in commodity derivatives should be closely following not only proposed reporting requirements and position limits generally under MiFID II and MiFIR, but reporting requirements and position limits that already are being enacted by some member states (see next article). MiFID II and MiFIR are scheduled to go into effect on January 3, 2017.