WASHINGTON The European Union is discussing delaying a deadline for a second time in its efforts to reform the global derivatives market, a source familiar with the matter said, as talks with U.S. regulators have failed to produce a breakthrough on a main sticking point.
The two sides are still at odds on allowing clearing houses, which stand between buyers and sellers of derivatives to reduce risk, to operate in each others' jurisdictions.
The impasse is adding uncertainty for U.S. clearing houses, which are concerned about losing business, while another delay would be a setback in reining in the $710 trillion market that was core to the financial crisis.
"Last year, there was optimism that we would move fast on a system where there would be more reliance on each other. I think it's fair to say that that has not gone as quickly as we had hoped," Steven Maijoor, the head of the European Securities and Markets Authority (ESMA) said in an interview.
The main point of contention is that the U.S. swaps regulator, the Commodity Futures Trading Commission (CFTC), is standing by its view that European clearing houses must comply with U.S. rules when operating in America, rather than relying on their home regulator's rules, the source said.
That, in turn, is a legal obstacle for Brussels to declare the U.S. rules equivalent to its own.
The EU needs to make such a declaration in order for U.S. clearing houses, such as that run by CME Group, to keep doing business in Europe beyond a Dec. 15 deadline.
If the stalemate is not solved by that date, European banks will need to hold far higher capital buffers for deals cleared through U.S. firms, and could take their business to clearing houses in countries recognized by Europe.
In a sign of how little hope regulators have of breaking the impasse, EU regulators are moving toward delaying the deadline after an earlier six-month delay, according to the source.
The CFTC declined to comment. CFTC Chairman Tim Massad said in July that the two sides were working on "appropriate deference" but that coordinating the rules would take time.
TIGHTENING THE RULES
Swaps are derivatives that were first designed to protect companies and investors against financial risks. Long unregulated, they ballooned in the heady days before the crisis when speculators started piling into them.
They played a major role in the 2007-09 financial meltdown, most notably when insurance firm AIG was hit by massive losses after risky derivatives bets went sour, and regulators across the world have since agreed to tighten the rules.
The standoff threatens to delay a global framework that would give supervisors more insight into the risks these once opaque markets harbor, while at the same time allowing banks and their clients to operate across borders.
In a snub to the United States, Europe in June publicly excluded it from a list of countries whose rules for clearing houses Europe deemed equivalent with those of its own, which included Japan, Hong Kong and Australia.
Industry groups have urged the two sides to cut a deal before Dec. 15, but the source said that Europe would not be able to let the U.S. clearing houses in as long as the CFTC continued to insist that European firms stuck to its rules.
ESMA's Maijoor would not comment on postponing the deadline. He did say he was optimistic that there would soon be an agreement for ESMA, CFTC and the U.S. Securities and Exchange Commission to cooperate on supervisory matters.
The CFTC is examining whether U.S. banks are evading another set of rules that forces swaps trading onto regulated platforms, by removing financial guarantees for transactions done from European subsidiaries.
But Maijoor said that while the regulator also had seen this happening, it emphasized the need to work together on myriad new rules for derivatives markets.
(Reporting by Douwe Miedema; Editing by Karey Van Hall and Grant McCool)