EU, U.S. Race to Spare Banks $5 Billion Clearing Capital Hitby
Options Clearing Corp. estimates capital impact on EU banks
EU, U.S. regulators strive to reach agreement before June 15
European Union and U.S. financial regulators are racing to agree on a plan to prevent billions of dollars in capital requirements from hitting banks’ trades in stock options and other securities starting next month.
The European Commission, the EU’s executive arm, and the U.S. Securities and Exchange Commission have stepped up talks ahead of June 15, when the capital increases are set to apply to EU banks’ trades at U.S. clearinghouses run by the Options Clearing Corp. and the Depository Trust and Clearing Corp. EU law requires banks to have more capital for trades at foreign clearinghouses that the bloc’s regulators say lack oversight and rules equivalent to its own.
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 imposition of punitive capital charges on OCC’s EU-bank affiliate clearing members would adversely impact the entire marketplace,” Craig Donohue, OCC’s executive chairman, said in an e-mailed statement. “At stake is a serious disruption to the U.S. listed equity options markets.”
The negotiations are the latest wrinkle in the debate between Europe and the U.S. over how to coordinate oversight of global securities and derivatives markets so they don’t fragment across regional or national lines. While many banks and other traders conduct transactions in both jurisdictions, regulators have moved at different speeds and put in place different rules that have complicated efforts to reach international agreements.
The Brussels-based commission postponed the capital deadline several times during its talks with the CFTC, and could do so again to give the SEC more time to finish its rule and for the two sides to coordinate. EU law allows such extensions “in exceptional circumstances where it is necessary and proportionate to avoid disruption to international financial markets.”
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.
Vanessa Mock, a spokeswoman for the European Commission, said by e-mail that “discussions are ongoing” and “we hope to finalize them soon.”
Ryan White, an SEC spokesman, declined to comment.
SEC Chair Mary Jo White told U.S. lawmakers in April that the two jurisdictions are in communication, are keen to avoid “having the markets disrupted” and that the SEC has made finishing the rules for clearinghouses a priority for this year.
The EU and the CFTC, the U.S. overseer of derivatives markets, in February announced a “common approach” on oversight of clearinghouses for swaps and futures. The equivalence decision followed a month later. Yet the main U.S. derivatives clearinghouses are still waiting for formal recognition from the EU markets regulator with only weeks to go before the same June 15 deadline.
While the discussions with the CFTC garnered most of the attention over the years, talks involving the SEC have only recently appeared to gain more urgency. Lobbyists for the OCC and DTCC held meetings with SEC commissioners last month on the pending rule in the U.S., according to public records.
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. The biggest effect may be in the mortgage-backed securities division where branches of foreign banks use DTCC’s services, according to Larry Thompson, DTCC’s vice chairman and general counsel.
“European firms would be disadvantaged from being able to access the capital markets in the U.S.,” Thompson said in an interview. “I think in the spirit of cooperation an extension until the rules can be finalized by the SEC -- all of the I’s dotted and the T’s crossed -- would make sense because you don’t want to put firms in Europe in a position where they would be penalized because the regulators have not been able to effectively get all of their work done.”
The clearinghouses’ push has been joined by lobbying trade associations representing Deutsche Bank AG and Barclays Plc among other European and global banks. The Institute of International Bankers, International Swaps and Derivatives Association and Securities Industry and Financial Markets Association asked White in a May 2 letter to “act swiftly” to finalize its rules and work with the EU on an equivalence determination.
“We hope the SEC prioritizes the finalization of these enhanced standards to avoid a potential market disruption and ensure access to covered clearing agencies,” the Futures Industry Association, a lobbying group whose members include banks, clearinghouses, exchanges and other firms, said in a letter to White last month.