Banks Set for Capital Reprieve as EU-SEC Derivatives Talks Drag

Banks using some U.S.-based clearinghouses to handle their derivatives trades are set to win a reprieve from tougher capital rules as the European Union continues talks with the Securities and Exchange Commission on regulatory equivalence.

The European Commission, the EU’s executive arm, plans a six-month delay in increasing capital charges on trades at clearinghouses in countries whose rules haven’t been deemed equivalent to those in the EU, a commission official said. That includes SEC-regulated clearinghouses, including ones run by the Options Clearing Corp. and the Depository Trust and Clearing Corp. Without the delay, billions of dollars in capital requirements would kick in on June 15.

U.S. regulation of clearinghouses is divided between the SEC and the Commodity Futures Trading Commission, which the EU recognized in March as having rules as tough as its own. While the SEC proposed in 2014 to impose stiffer standards on clearinghouses than current practice, the agency hasn’t yet completed that regulation, making it more difficult for Europe to reach the key equivalence decision.

The Brussels-based commission postponed the capital deadline several times during its talks with the CFTC. EU law allows such extensions “in exceptional circumstances where it is necessary and proportionate to avoid disruption to international financial markets.”

Exchange-Traded Options

Clearinghouses stand between buyers and sellers and collect collateral from both sides in an effort to limit the impact one trader’s default could have on the wider financial system.

The OCC, which is based in Chicago, is the primary clearinghouse for exchange-traded options and also guarantees certain prominent futures contracts, including those tied to the Chicago Board Options Exchange’s Volatility Index, or VIX. EU banks that are members of OCC could be required to have an additional $5.25 billion in capital as a result of the requirements slated to take effect next month, according to an OCC analysis of data from December.

The rule also affects two divisions of New York-based DTCC: the Fixed Income Clearing Corporation, which handles government and mortgage-backed securities, and the National Securities Clearing Corporation, which handles equities and other securities.

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