September 7, 2017 / 1:13 PM / 10 months ago

DERIVATIVES-FIA warns against EU clearing relocation proposals

LONDON, Sept 7 (IFR) - The Futures Industry Association has warned against plans by European Union lawmakers to force euro-denominated derivatives clearing into the bloc, noting that contracts must remain freely traded and cleared in order to preserve the euro’s status as a reserve currency.

In a response to the European Commission’s proposals in June for enhanced supervisory powers over third-country clearinghouses, including location requirements for the most systemically important entities, the FIA welcomed appropriate supervision of third-country CCPs, but warned against forced relocation.

“Forced relocation of clearing could distort markets, fragment liquidity, and raise costs for market participants globally,” said Walt Lukken, president and CEO of FIA.

“The EC can better achieve the goal of improving the oversight of third-country CCPs by updating its proven equivalence regime and enhancing the supervision for CCPs that are systemically important in the EU.”

Once the UK leaves the EU in March 2019, the proposed rules could threaten the dominance of LCH, which clears €1.3trn daily notional of euro-denominated derivatives through its London-based SwapClear platform.

In an attempt to avoid additional disruption of clearing services in the event of a CCP’s “derecognition” and forced relocation, the industry body has called on lawmakers to provide clear criteria for its determinations.

The FIA also calls for a service-level assessment of a CCP’s systemic importance, noting that it is unlikely that every part of a CCP’s business would be so systemically important that it should not be recognised.

“Rather than having to determine the entire legal entity of a third-country CCP as subject to relocation, it should be possible to make such designation at the level of a specific CCP service,” the FIA said as one of its 23 recommendations for ensuring enhanced supervision without distorting markets.

Under current EC proposals, there is no requirement for the European Securities & Markets Authority, which is tasked with such decisions, to consult beyond the relevant central banks prior to making a relocation determination.

The FIA said that ESMA should consult publicly prior to any decision, allowing for input by CCPs, market participants who could face increased costs, and third-country authorities, which are also affected.

“It is essential that stakeholders be given the opportunity to provide input once a proposal is being considered,” the FIA said.

The industry body also called for further detail on the mechanics of derecognition, including the date that new trades cannot be entered into the CCP, and the time that all existing trades need to be closed out.

Further clarification will also be required over the specific services covered by the derecognition where one party is in the EU, and how such a limitation would not lead to a bifurcation of liquidity and distortion of competition. (Reporting by Helen Bartholomew)

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