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

SEC commissioners voted Wednesday to adopt standards that will apply to firms including the Options Clearing Corp. (OCC) and Depository Trust and Clearing Corp. (DTCC). Once the stiffer measures are in place, the SEC and the European Commission, the EU's executive arm, could accelerate talks on the equivalence of their regulations.

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

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

“In setting forth these requirements, the recommendation is cognizant of the global system of regulation that currently exists for clearing agencies that may be regulated by multiple authorities,” SEC Chair Mary Jo White said in prepared remarks before commissioners voted.

OCC Executive Chairman and Chief Executive Officer Craig Donohue called the SEC's move a “critical step toward an equivalency agreement 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 and European Commission will begin negotiations and arrive at a resolution quickly” after the U.S. regulator acted on its rules.

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

Financial Crisis

The vote is the latest step in years of negotiations between the U.S. and Europe on how to coordinate oversight of global securities and derivatives markets after the 2008 financial crisis. While banks and many other firms trade in both jurisdictions, regulators have moved at different speeds and put in place different rules that have complicated efforts to reach international agreements.

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

The European Commission delayed the increase in capital requirements in June to avoid disruption to international financial markets and to prevent penalizing institutions while clearinghouses awaited recognition. Earlier equivalence talks with the U.S. have taken years and the EU has repeatedly delayed the capital increases to give both sides additional time to resolve disagreements.

Clearinghouses and lobbying trade associations representing Deutsche Bank AG and Barclays Plc, among other European and global banks, have pressed authorities to coordinate. Three of the biggest lobbying groups asked White in May to “act swiftly” to complete the regulations.

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

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

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

Instant Insights /

SEC Finalizes Derivatives Clearing Rules

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