In a subcommittee hearing of the House Agriculture Committee on June 26, major derivatives industry players warned that proposed E.U. revisions to regulations for non-E.U. clearinghouses could cause significant disruption to the global derivatives markets, including market fragmentation and increased systemic risk.
“The largest concern is a possible relocation provision requiring that all clearing move to the EU either by the letter of the law or by making it so expensive that companies outside the EU will be priced out of competition,” said Subcommittee Chairman David Scott (D-Ga).
Brexit. Currently, if no agreement is reached by October 31, 2019 and the deadline is not extended, then the U.K. will leave the E.U. without transitional agreements in place, explained Daniel Maguire, CEO of LCH Group. This possibility is called “Hard Brexit.”
EMIR 2.2. In 2016, the CFTC reached an agreement on the regulation of derivative clearinghouses with the E.U., ensuring that E.U. and U.S. clearinghouses operate at the same high standards and comparable costs. But last year, as the E.U. prepared for the potential impact of Brexit, the E.U. Parliament passed the European Market Infrastructure Regulation (EMIR 2.2). This “unilaterally scrapped” the 2016 equivalence agreement, said Scott.
According to Scott, EMIR 2.2 has serious negative implications for U.S. clearinghouses, including:
EMIR 2.2. In 2016, the CFTC reached an agreement on the regulation of derivative clearinghouses with the E.U., ensuring that E.U. and U.S. clearinghouses operate at the same high standards and comparable costs. But last year, as the E.U. prepared for the potential impact of Brexit, the E.U. Parliament passed the European Market Infrastructure Regulation (EMIR 2.2). This “unilaterally scrapped” the 2016 equivalence agreement, said Scott.
According to Scott, EMIR 2.2 has serious negative implications for U.S. clearinghouses, including:
- Administrative fees charged to clearinghouses in other countries in exchange for oversight by the E.U.;
- Comparable compliance discounts instead of grandfathering, which means that even when deemed comparable the only difference is a 15, 20 or 35 percent discount on fees;
- A very complex tiering regime where the difference between tier one and tier two is fees that are as much as seven times higher;
- A possible relocation provision requiring that all clearing move to the EU by law.
Industry concerns. According to Terry Duffy, chairman and CEO of the CME Group, the E.U. reforms overreach and do not match the U.S. approach, which allow clearinghouses outside the U.S. to clear foreign futures for U.S. persons without supervision or oversight from the CFTC.
“Ultimately, the E.U.’s imposition of its laws and regulations risk weakening the stability of the U.S. and global financial systems and fragmenting U.S. futures markets, while potentially undermining the central role the U.S. has played in the global commodities markets,” said Duffy.
Walt Lukken, president and CEO of FIA, the leading derivatives industry association, noted that FIA worked to secure a commitment, announced in December 2018, from the European Commission to allow U.K. clearinghouses temporary continued access to the EU in the event of a no-deal Brexit. This commitment and subsequent recognition decisions for three U.K. clearinghouses was an “enormous success,” but the FIA is concerned about the EMIR 2.2 requirements as they relate to U.S. clearinghouses.
“FIA stands ready to comment on all these proposals to ensure the proven regulatory deference and recognition approach remains the standard for cross-border regulation,” said Lukken.
McGuire said that LCH is directly registered with the CFTC and considers this appropriate given LCH’s significant risk management role in the U.S. financial markets. Other models may be more proportionate for clearinghouses that do not manage the same level of risk in a foreign jurisdiction, he said.
Chris Edmonds, senior vice president of financial markets at Intercontinental Exchange, Inc. (ICE), said that a global approach to supervision brings significant benefits. According to Edmonds, ICE believes that the policy goal of appropriate clearinghouse supervision can be achieved by the European Securities and Markets Authority (ESMA) employing mechanisms based on international standards such as CPMI-IOSCO, together with continued cooperation and information-sharing agreements among clearinghouse supervisory authorities.
Stephen Berger, managing director and global head of government & regulatory policy at Citadel LLC, testifying on behalf of the Managed Funds Association (MFA) said that the MFA has been actively engaging with policymakers to address complexities arising from Brexit.