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EU Plays Catch-Up on Swaps Collateral Under U.S. Pressure

  • European Commission says it seeks to closely align deadlines
  • U.S. and Japanese regulators have opposed delays in regulation

European Union regulators are considering ways to speed the implementation of collateral requirements for derivatives as the bloc’s failure to meet a global deadline threatens to fracture the $493 trillion market.

The European Commission said last month it wouldn’t meet a Sept. 1 global deadline. In a draft letter addressed to the main EU regulators, the bloc’s executive arm is now proposing to adapt its plans to “align with the internationally agreed timelines as closely as possible.” 

Previously, the commission said it would finish EU technical rules on margins for non-centrally cleared over-the-counter derivatives by year-end and have them take effect before mid-2017. That prompted a backlash from regulators in Washington and Tokyo, who said they intended to impose the rules on schedule, while leaving the door open to a delay.

The regulations will apply billions of dollars in collateral demands to swaps traded by the world’s largest banks, including JPMorgan Chase & Co., Barclays Plc and Deutsche Bank AG. The financial industry has called for global regulators to enforce the requirements at the same time to avoid creating the potential for regulatory arbitrage between jurisdictions.

Start Dates

The Basel Committee on Banking Supervision, which includes regulators from around the world, helped set the international deadlines that start taking effect for the biggest banks in September and ratchet up starting in March 2017. The over-the-counter swap market is estimated at $493 trillion by the Bank for International Settlements.

In the undated draft letter seen by Bloomberg, the commission proposed that the requirements would take effect one month after the EU’s technical rules enter into force. Subsequent start dates in the global agreement would be maintained as long as EU rules enter into force in time.

There is no firm timeline for completing the EU rules. 

A commission spokeswoman declined to comment on the draft letter. In June, the commission said it’s “strongly supportive” of global standards on non-cleared margin and “intends to bring them into force as soon as possible.”

The timing gap threatens to raise competitive pressures, since U.S. banks will need to comply with the requirements earlier than European rivals. This divergence could discourage trading between U.S. and European banks in the interim and make it more expensive for U.S. banks.

Global Deadline

The head of the U.S. Commodity Futures Trading Commission, a key member of the U.S. Federal Deposit Insurance Corp. and a senior Japanese regulator all have said they want to stick to the global deadline. Steven Maijoor, the head of the European Securities and Markets Authority, said last month that he was unhappy with the decision to postpone the standards.

“I am disappointed that the timeline has been postponed,” Maijoor said on June 29. “I think what is now important is to keep the delay as minimal as possible.”

ESMA and the two other main EU regulators said in June 30 letter to the commission that they have “strong concerns” with the delay that could have “significant negative impact.”

Meanwhile, the Swiss financial markets regulator said last week that it would seek to align its standards with those put in place by the EU.

Margin Requirement

The International Swaps and Derivatives Association, the main lobbying group for banks and other traders in the market, has called on regulators to realign schedules to meet the standards.

“The divergence in margin requirement implementation dates will cause fragmentation in the market and a reduction in liquidity,” Scott O’Malia, ISDA’s chief executive, said in a July 8 letter to the Basel Committee. The association called for a new international schedule to be set based on the EU deadlines.

U.S. banking and derivatives regulators are also coming under pressure from Congress to coordinate with Europe. The top Republican and Democrat on the House Agriculture Committee, which oversees derivatives markets, said in a letter to six regulators that “if no regulator is willing to make a change, years of effort to carefully negotiate this change in global derivatives markets will be undone.”

The July 14 letter was sent to the Federal Reserve, Federal Deposit Insurance Corp. and Commodity Futures Trading Commission among the regulators, which share responsibility for putting the requirements in place in the U.S.

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