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Kim Taylor, president of CME Clearing, said the clock was ticking to resolve disagreements among regulators over substituted compliance for third countries. “We have a situation right now where Europe is saying US rules on central counterparties (CCPs) aren’t stringent enough, yet if you actually look at the rules, they offer similar levels of safety,” she told the IDX audience. Examples include margin requirements, where the European Securities and Markets Authority (ESMA) has set a minimum standard of two-day margin for non-OTC derivatives trades, while the US requires one day. Taylor argued that the US requirement for firms to hold 220% of the margin needed in Europe makes the rules equivalent from a safety perspective.
Margin requirements for the European market infrastructure regulation (EMIR) are due to be phased in for different products between 1-15 December this year. Taylor said that unless regulators can agree on substituted compliance rules, European banks might find themselves unable to use non-EU products to hedge, increasing both costs and risk. Paul Swann, president and managing director of ICE Clear Europe, agreed that regulators were too focused on individual rules, warning that firms would seek out regulatory arbitrage opportunities. He added, “What we need to be thinking about is, how does this affect the end-user? The focus should be on safety and we need to ensure customers aren’t selecting their location based on which CCPs are cheapest but provide less safety.”
The panel disagreed on the extent to which segregation of client accounts with CCPs can or should be standardised in Europe, with some believing clients will always want choice, while others felt standards will naturally evolve over time.