The dispute revolves around a rule that would require European market players to hold far more capital than US counterparts for clearing trades, with the disparity holding up a broader transatlantic deal on supervising a derivatives market that largely trades out of London and New York.
Clearing houses stand between two sides of a derivatives trade to ensure its completion even if one side goes bust. The liquidation period is the time regulators think that clearing houses need to deal with a potential default.
The EU's requirement is for a two-day liquidation period, compared with one day in the United States. However, a longer period typically means that more collateral has to be posted to back a trade, ESMA said. That has proved an obstacle to regulatory efforts to increase the use of clearing to make the derivatives market safer and more transparent.
"The difference in EU and US standards gives rise to the risk of regulatory arbitrage," ESMA said in its paper, adding that it would look at whether it would be appropriate to apply a one-day liquidation period.
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