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EU and US settle dispute on derivatives


The European Commission and the US Commodity Futures Trading Commission (CFTC) have reached agreement on a long-running dispute over central counterparties (CCPs) in derivatives transactions.

The two bodies have agreed a common approach to regulation and supervision of global derivatives markets, to allow European CCPs to do business in the United States more easily and US CCPs to continue to provide services to EU companies.

Under rules introduced after the banking crisis EU banks must ensure they have capital to cover part of their exposure to derivatives trades transacted through clearing houses. To date, that requirement has been higher for trades routed through US clearing houses than through those in the EU or in countries whose rules, as regards clearing houses,  are treated by the EU as 'equivalent' to EU rules.

A transitional period was put in place in 2013 by the EU Capital Requirements Regulation and regularly extended as the two sides failed to reach an agreement. If the transitional period had come to an end, US clearing houses would no longer be treated as CCPs from a capital perspective, increasing the costs for European clearing firms to use US clearing houses.

The Commission will now accept CFTC requirements as equivalent to EU rules. The European Securities and Markets Authority (ESMA) will recognise US CCPs, who will be able to provide services in the EU while complying with their own local rules.

The new common approach follows detailed analysis of the differences between the CFTC and EU regulatory requirements, the Commission said.

Jonathan Hill, commissioner for financial services said: "This is an important step forward for global regulatory convergence. It means that European CCPs will be able to do business in the United States more easily and that US CCPs can continue to provide services to EU companies."

"It has taken a long time, but it is good news that after more than three years of discussion, we are now able to provide certainty for the marketplace," Hill said.

Timothy Massad, chairman of  CFTC said in December that he believed the dispute could be resolved after ESMA proposed changes to regulatory technical standards that would reduce the period for which money should be held by a central counterparty in derivatives transactions from two days to one.

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