Commodity Futures Trading Commission Chairman Timothy Massad, and Jonathan Hill, European Commissioner for Financial Stability, Financial Services and Capital Markets Union, released a joint statement on May 7 relating to the ongoing discussions between the CFTC and the European Commission (EC) on an equivalence determination in respect to CFTC-registered derivatives clearing organizations located in the United States (US DCOs). The European Market Infrastructure Regulation (EMIR) provides that a central counterparty located outside the European Union (non-EU CCP) may only be granted the status of “recognized CCP” by the European Securities and Markets Authority (ESMA) where the EC has previously made a determination that the legal and regulatory requirements applicable to such non-EU CCPs in its home jurisdiction are equivalent to those imposed by EMIR. The EC adopted equivalence decisions in respect to Australia, Hong Kong, Japan and Singapore in late 2014, but has not yet made a decision in respect to the United States. In their joint statement, Massad and Hill state that discussions are “constructive and progressing” and they share the goal of reaching an agreed approach by this summer.
The inability of US DCOs to obtain recognized CCP status under EMIR poses risks to the transatlantic swaps markets. In particular, over-the-counter derivatives subject to a European mandatory clearing determination may not be submitted for clearing to a US DCO until such time as it becomes a recognized CCP. It also threatens to trigger consequences under the EU Capital Requirements Regulation (CRR), which requires European banks to hold capital for exposures to CCPs. These capital charges are significantly higher for exposures to any non-EU CCP that is not a recognized CCP under EMIR. In order to avoid the impact of these additional costs, clearing member subsidiaries of European banks could, therefore, withdraw from US DCOs, which could further fragment the transatlantic financial markets. In light of the ongoing discussions between the CFTC and the EC on CCP equivalence, the European Banking Committee (EBC) voted on April 24 to push back the compliance deadline for holding capital against CCP exposures under the CRR to December 15. The EBC already had granted an extension that would have expired on May 15.
This joint statement follows ESMA’s announcement last week that it had granted final recognition under EMIR to the following 10 non-EU CCPs located in Australia, Hong Kong, Japan and Singapore: ASX Clear (Futures) Pty Limited; ASX Clear Pty Limited; Hong Kong Securities Clearing Company Limited; HKFE Clearing Corporation Limited; OTC Clearing Hong Kong Limited; The SEHK Options Clearing House Limited; Japan Securities Clearing Corporation; Tokyo Financial Exchange; Central Depository (Pte) Limited; and Singapore Exchange Derivatives Clearing.