NEW YORK (IFR) - The European Union is looking to again postpone imposing new capital rules on EU banks that trade derivatives through non-EU clearing houses, according to a document seen Tuesday.
Amid an ongoing test of wills between European and U.S. regulators, the EU has scheduled a vote Friday to delay the decision until December, a draft of Friday’s agenda says.
If approved it would be the third consecutive six-month grace period for European banks exempting them from an EU requirement to hold more capital when trading derivatives at unapproved foreign exchanges.
The current extension expires in June. The EU proposal seen by IFR warns of potential “disruption” in the roughly US$700trn global derivatives market if the grace period is not extended.
Under new rules formulated after the financial crisis, EU banks must hold the extra capital if they clear trades through any jurisdiction not deemed “equivalent” to EU standards.
But while the EU’s executive body, the European Commission, has granted equivalence to countries such as Singapore, it has pointedly refused to do so as yet for the United States.
Many believe this is due to residual frustration among European regulators, who feel they were not sufficiently consulted when the US formulated its own derivatives trading guidelines in the wake of the crisis.
“Without an EU recognition of equivalence, US clearing houses will not be able to clear EU-mandated derivatives,” Terry Duffy, chairman of CME Group, a US derivatives exchange, told Congress last month.
“The European Commission’s discriminatory approach to US access to EU markets is creating a significant disadvantage for U.S. markets and the participants that use those markets.”
Clearing houses serve as intermediaries between buyers and sellers of over-the-counter derivatives contracts such as credit default swaps, which act as insurance in case of a debt default.
Their importance has grown in the international derivatives market since 2009, when the powerful G20 group of nations agreed to push most over-the-counter trades through such houses.
The firms help mitigate some of the risks inherent in derivatives - the kinds of complex debt investments that many blamed for deepening the last global financial crisis.
On the face of it, the EU grace period allows EU banks to keep funneling business to US clearing houses by sparing those banks from keeping an estimated 25 to 30 times more capital than previously when trading in certain derivatives.
But postponing final declaration of U.S. “equivalence” - which sources say the bloc will do again Friday - seems to many to be part of an old-fashioned, behind-the-scenes trade war.
“If anything, regulators seem to be moving further apart,” said one head of OTC trading at a European clearing house who asked not to be named.
“They’re beginning to really dig their heels in.”
When working on what would become Dodd-Frank legislation, the then-head of the US Commodity Futures Trading Commission (CFTC), Gary Gensler, was perceived as having pushed through rules that hamstrung trading between the US and the EU.
Both the CFTC and the European Commission deny any bad blood exists between them.
But another delay Friday on granting US equivalence status - which sources say has essentially already been decided - will do little to please the US clearing houses or their regulators.
Says CME Group’s Duffy: “Already we are seeing European clearing members and other market participants taking steps to consider alternatives to US exchanges and clearing houses.”
Reporting by Mike Kentz; Additional reporting by Huw Jones; Editing by Marc Carnegie