U.S. and European Union regulators reached an agreement on oversight the $553 trillion global derivatives market, seeking to prevent capital increases from hitting EU banks this year and enabling CME Group Inc. to continue settling some of the world's most common contracts.
The European Commission, in an attempt to end more than two years of regulatory debate that threatened to fracture the market, said in a statement on Wednesday that it would adopt a so-called equivalence decision "shortly," acknowledging that U.S. supervision of clearinghouses such as CME Group's is equivalent to its own. Without the key finding, traders would have faced higher EU capital requirements if they wanted to guarantee swaps, futures and other derivatives in the U.S.
"Our agreement is critical to ensuring that our global derivatives markets remain robust, while keeping our financial system as stable and resilient as possible," U.S. Commodity Futures Trading Commission Chairman Timothy Massad said. "It is a significant milestone in harmonizing regulation of these markets."
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Jonathan Hill, the EU financial services chief, said the deal means that "European CCPs will be able to do business in the United States more easily, and that U.S. CCPs can continue to provide services to EU companies."
The agreement lays out a common approach to how both jurisdictions will oversee the biggest clearinghouses in the market, including those operated by LCH.Clearnet Group Ltd., Intercontinental Exchange Inc., Deutsche Boerse AG's Eurex and CME.
The regulators began to move more urgently to reach an agreement with European requirements for more trades to be settled at the clearinghouses starting to take effect in June. Under the rules, certain trades done before or after Feb. 21 — but before the clearing obligation takes effect — will also need eventually to be cleared, meaning firms were already starting to plan on how deals would be conducted and which clearinghouse might be used.
Terrence Duffy, executive chairman of CME, said on an earnings call on Feb. 5 that the talks have been "a big issue" and that the company, which guarantees trades in its Chicago- based clearinghouse, was working with Massad about the looming February deadline.
"I think the chairman has recognized that there could be market disruptions and that would be the worst thing that could happen – not only to the U.S. market, but to the European participants as well, if equivalence is not granted to the United States," Duffy said on the call.
Bloomberg News
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