LONDON (Reuters) - The European Union should speed up recognition of non-EU clearing houses to avoid compounding emerging market volatility and fragmenting the $630 trillion derivatives market, a global exchanges body said on Wednesday.
The World Federation of Exchanges (WFE) said delays by Brussels in deciding whether to allow non-EU clearing houses to continue serving European users risk a capital flight from some emerging market economies.
Clearing houses stand between two sides of a trade to ensure a transaction is completed even if one side goes bust. Regulatory approval is becoming more pressing because mandatory clearing of some derivatives contracts starts next year, meaning customers must decide soon which clearing house they will use.
The EU’s executive European Commission must deem a third-party country’s clearing house rules to be “equivalent” or as strict as those in the 28-country bloc.
Without this determination, a non-EU clearing house for derivatives such as credit default swaps would have to hold more capital to do business with investors in the EU, hence bumping up fees for users.
Brussels is already locked in prolonged negotiations with Washington over whether U.S. clearing rules are equivalent to its own, while determinations for 31 clearing houses from 14 other countries remain in line.
London is one of the world’s top derivatives trading centers, used by market participants from across the world.
“Delayed equivalence will increasingly have the effect of cutting off third-country clearing houses from European market participants,” WFE Chief Executive Nandini Sukumar said in a statement.
“This threatens to lead to a re-allocation of derivatives trading activity and liquidity away from markets that have not received equivalence determinations,” Sukumar said.
Without timely decisions on equivalence, existing pools of liquidity in derivatives that are traded and cleared on a cross-border basis will fragment, she added.
Sukumar has written to Jonathan Hill, the European Commission member responsible for financial services, asking him to address the WFE’s concerns.
Hill has said he hopes the negotiations with the United States will be concluded in coming weeks.
Editing by David Holmes