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European Commission adopts equivalence for US central counterparties

The European Commission has settled a long-running argument over US derivatives clearing houses by recognising US regulation as equivalent to that in the EU.17 Mar 2016

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. That requirement has been higher for trades routed through US clearing houses than through those in the EU or in countries whose clearing house rules  are treated by the EU as 'equivalent' to EU rules.

However, the Commission has now "determined that the US Commodity Futures Trading Commission (CFTC) has the equivalent requirements as the EU in regulating central counterparties".

A clearing house is an entity that acts as the central counterparty (CCP) between the buyer and seller to a particular trade, effectively acting as the buyer to every seller and the seller to every buyer. As a result neither the seller nor the buyer is exposed to the risk of the other defaulting because the credit risk has been shifted to the CCP.

Firms that want to offer CCP services in the EU must seek authorisation under the EU's derivatives regulatory framework, called the European Markets Infrastructure Regulation (EMIR). CCPs based outside the EU that want to offer clearing services in the EU need to be recognised under EMIR by the European Securities and Markets Authority (ESMA), but can only do so if the country in which they are based has been declared to have equivalent standards of regulation and supervision of CCPs.

The issue threatened to affect the costs of US-EU cross-border trading on US exchanges. In practice, the EU Capital Requirements Regulation has continued to extend a transitional period during which the higher capital requirements did not apply, until the equivalence agreement could be reached.

The move will encourage market certainty and cross-border activity, avoiding fragmentation of markets and liquidity, the Commission said.

Jonathan Hill, commissioner for financial stability, financial services and capital markets union said: "This is an important step forward for global regulatory convergence and implementing our agreement with the CFTC. It means that US CCPs, once recognised by ESMA, can continue to provide services to EU companies."