The prospect of an authorisation tug-of-war stems from the European Market Infrastructure Regulation (EMIR), which states that a country's clearing regulation can only be deemed equivalent if it has a reciprocal regime for authorising European and other third-country clearers.
The Commodity Futures Trading Commission (CFTC) is currently working on that regime, and gave a preview at a meeting of its Global Markets Advisory Committee on Wednesday. In general, a non-US CCP that qualifies as an exempt derivatives clearing organisation (DCO) would be allowed to take on US clearing members under its local rules, and would not need to go through the full DCO registration process, but CFTC staff also made it clear member firms would not be allowed to take on US clients. At the meeting, David Bailey, head of market infrastructure and policy at the UK Financial Conduct Authority (FCA), warned this may not count as a reciprocal CCP recognition regime.
Article 25(6) of EMIR sets out the conditions the EC has to consider when deciding whether a country's rules are equivalent to those in Europe. One condition is that "the legal framework of that third country provides for an effective equivalent system for the recognition of CCPs authorised under third-country legal regimes". Lawyers recognise that could be a problem: "I anticipate that there are open questions concerning whether the European Commission would regard this potential CFTC approach as truly providing for an 'effective equivalent system' for the recognition of non-US clearing houses. This is a key determination that needs to be made in order for the European Commission to adopt a positive equivalence decision for a US clearing house seeking recognition under EMIR", says Jeff Dinwoodie, an associate at Davis Polk in Washington, DC.
If the EC decided the US did not have an equivalent set of rules in place to recognise third-country CCPs, it would not be able to grant country-level equivalence. That is a prerequisite if a CCP is to get a green light from the European Securities and Markets Authority and become a so-called qualifying CCP (QCCP), which in turn allows banks to apply lower risk-weights to their cleared exposures.
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