European Union banks are a step closer to avoiding billions ofdollars of capital charges on their trades in derivatives and othersecurities after the U.S. Securities and Exchange Commission(SEC) adopted final rules for clearing firms.

SEC commissioners voted Wednesday to adopt standards that willapply to firms including the Options Clearing Corp. (OCC) andDepository Trust and Clearing Corp. (DTCC). Once the stiffermeasures are in place, the SEC and the European Commission, theEU's executive arm, could accelerate talks on the equivalence oftheir regulations.

EU law requires sharp increases in capital requirements onbanks' trades settled at clearinghouses based in countries whoseoversight and rules haven't been deemed as robust as those in thebloc. Barring an equivalence decision or a delay, the tougherrequirements would kick in on Dec. 15.

On Wednesday, the SEC voted to require that clearinghousesdesign and enforce corporate governance policies and put in placeprocedures to manage risk including stress testing. Separately,commissioners also proposed expanding the type of clearing agenciesto be impacted by the new rules.

“In setting forth these requirements, the recommendation iscognizant of the global system of regulation that currently existsfor clearing agencies that may be regulated by multipleauthorities,” SEC Chair Mary Jo White said in prepared remarksbefore commissioners voted.

OCC Executive Chairman and Chief Executive Officer Craig Donohuecalled the SEC's move a “critical step toward an equivalencyagreement between the SEC and the European Commission.”

Mark Wetjen, managing director for global public policy at DTCC,said before the meeting that “it is expected that the SEC andEuropean Commission will begin negotiations and arrive at aresolution quickly” after the U.S. regulator acted on itsrules.

A spokeswoman for the EU commission said discussions with theSEC are continuing.

Financial Crisis

The vote is the latest step in years of negotiations between theU.S. and Europe on how to coordinate oversight of global securitiesand derivatives markets after the 2008 financial crisis. Whilebanks and many other firms trade in both jurisdictions, regulatorshave moved at different speeds and put in place different rulesthat have complicated efforts to reach internationalagreements.

U.S. regulation of clearinghouses is divided between the SEC andthe Commodity Futures Trading Commission (CFTC), which the EUrecognized in March as having rules as tough as its own.Clearinghouses stand between buyers and sellers and collectcollateral from both sides to limit the impact one trader's defaultcould have on the wider financial system.

The European Commission delayed the increase in capitalrequirements in June to avoid disruption to international financialmarkets and to prevent penalizing institutions while clearinghousesawaited recognition. Earlier equivalence talks with the U.S. havetaken years and the EU has repeatedly delayed the capital increasesto give both sides additional time to resolve disagreements.

Clearinghouses and lobbying trade associations representingDeutsche Bank AG and Barclays Plc, among other European and globalbanks, have pressed authorities to coordinate. Three of the biggestlobbying groups asked White in May to “act swiftly” to complete theregulations.

OCC, based in Chicago, is the primary clearinghouse forexchange-traded options and also guarantees certain prominentfutures contracts, including those tied to the Chicago BoardOptions Exchange's Volatility Index, or VIX. EU banks that aremembers of OCC could be required to have an additional $5.25billion in capital as a result of the requirements, according to anOCC analysis of data from December.

The rule also affects two divisions of New York-based DTCC: theFixed Income Clearing Corp., which handles government andmortgage-backed securities, and the National Securities ClearingCorp., which handles equities and other securities.

Despite voting for the new requirements which she said were longoverdue, SEC Commissioner Kara Stein said in prepared remarks thatthe standards should have been made stronger, adding that the newrule “marginally decreases the risk posed by systemically importantclearing agencies.” Stein urged people to use the proposed changesto the definitions related to clearing agencies to suggest how theSEC can further bolster standards.

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