LCH.Clearnet Group Ltd. said it obtained regulatory permission to clear credit default swaps for U.S. members via its clearinghouse in Europe, a day after American and European Union authorities agreed to cut overlap.
The U.S. Commodity Futures Trading Commission gave the approval to Paris-based LCH.Clearnet SA, even as it considers LCH’s application to register as a derivatives clearing organization, or DCO. U.S. members can now clear proprietary CDS index trades through the unit, LCH said.
The CFTC and the European Commission yesterday said they broke a deadlock over whether the U.S. could impose its rules on trades booked in Europe. Banks and other swaps traders said the deal reduces the chance they will be forced to comply with conflicting regulatory regimes.
“There was a perceived difference in regulation and the announcement yesterday goes towards making the market more consistent,” Charlie Longden, chief executive officer of LCH’s CDSClear, said in an interview. “It also keeps liquidity together rather than splitting it. Four of the 12 banks we work with under CDSClear are U.S. banks and couldn’t clear through our platform as a result of that regulation. So this paves the way for them to clear.”
LCH, which is now majority-owned by London Stock Exchange Group Plc, is targeting growth in Asia and the U.S. The company in February last year appointed David Weisbrod, who spent 40 years at JPMorgan Chase & Co., to head its U.S. unit. LCH operates CDSClear and is also the world’s largest interest-rate-swap clearinghouse.
Under the deal this week, the CFTC agreed to accept some European rulemaking as “essentially identical” to U.S. standards, allowing companies to apply only the rules of the jurisdiction where they are based. The concessions include norms on risk mitigation and how traders should settle disputes over the valuation of derivatives contracts.
The European Union has long sought a system of so-called “equivalence,” where it accepts that U.S. rules are equally rigorous as its own and allows U.S. banks to comply only with their domestic requirements. The CFTC had resisted such a reciprocal approach toward Europe.
The world’s largest swaps dealers including JPMorgan Chase, Deutsche Bank AG and Barclays Plc are transitioning the $23.5 trillion privately negotiated credit derivatives market to clearinghouses to reduce the risk of a counterparty failing.
“The CDS market is so concentrated that we probably won’t get more than 15 or 20 members in total,” Longden said. “So it’s very important for us to get critical mass and getting this no-action relief means the U.S. banks can join us quicker than waiting for the DCO.”