Banks Press EU to Drop `Arbitrary' Derivatives-Collateral Ruleby
Measure would cause `operational complexities,' groups say
Intra-day requirement is part of EU-U.S. debate on clearing
Banks and clearinghouses are lobbying European Union regulators to shelve a proposal setting collateral requirements during the trading day, warning that it could upend broader efforts to reach a deal with the U.S. on oversight for the global derivatives market.
The Futures Industry Association and International Swaps and Derivatives Association, two of the leading trade groups for the biggest dealers in derivatives, said in a joint letter released on Thursday that the plan for intra-day collateral requirements at clearinghouses will cause “major and disproportionate operational complexities” and is inconsistent with U.S. rules.
The requirement, proposed in December by the European Securities and Markets Authority, “could re-introduce the potential regulatory arbitrage situation” that the proposal “is specifically targeted to resolve,” the groups said in the letter, which ESMA made public. Banks and clearinghouses say there are already sufficient systems to collect collateral if necessary during the day and that the new regulatory requirement is unnecessary.
Intercontinental Exchange Inc., which is based in the U.S. and operates a European clearinghouse, said the requirement “should be removed completely” to reach equivalence with the U.S. Commodity Futures Trading Commission, the main U.S. derivatives regulator. “CFTC rules have no such requirement,” the company said.
The intra-day requirement is the latest wrinkle in more than two years of debate between the EU and U.S. on supervision of clearinghouses, which stand between buyers and sellers and receive collateral from both sides. The two sides have been negotiating policy changes that would enable European authorities to make a key finding that U.S. rules are equivalent to their own and strong enough that extra capital isn’t necessary to protect against losses.
The industry has repeatedly called for the two sides to reach a deal that would avoid a major hike in capital requirements for European banks when they use a U.S. clearinghouse. The CFTC and European Commission, the EU’s executive arm, have both said the talks have progressed recently and that a deal is expected soon.
The intra-day requirement was included in a broader proposal from ESMA in December to allow European clearinghouses the option of offering some U.S.-style collateral rules. Under the proposal, European clients could use the U.S. system for futures and other exchange-traded derivatives. The proposal has generally been praised by the industry as a step toward achieving a trans-Atlantic agreement.
ESMA said that clearinghouses need “more stringent requirements” to monitor and collect intra-day collateral if they adopt the U.S.-style system. The proposal said clearinghouses should calculate collateral requirements at least hourly and collect additional collateral within an hour if the new requirement is higher than 120 percent of the available collateral.
“The proposed threshold is arbitrary,” Deutsche Bank AG’s head of regulatory policy said in a Feb. 1 letter to ESMA.