EU to allow U.S.-style derivatives option to secure transatlantic deal

LONDON (Reuters) - European Union regulators have proposed U.S.-style flexibility in how rules making derivatives safer are applied in a bid to reach a long-delayed transatlantic deal on supervising the $552 trillion sector.

European Union flags flutter outside the EU Commission headquarters in Brussels, Belgium, October 28, 2015. REUTERS/Francois Lenoir

The 28-country bloc and the United States are locked in negotiations over recognizing each other’s rules for trading derivatives such as interest rate swaps.

The rules are being introduced after the 2007-09 financial crisis highlighted how the hitherto opaque markets accentuated uncertainties for markets.

The EU’s European Securities and Markets Authority (ESMA) said on Monday it was proposing to broaden the bloc’s rules for third party agencies, known as clearing houses, that stand between two sides of a trade to ensure its smooth completion.

A transatlantic deal has stumbled over a key difference whereby the United States requires only a one-day “liquidation period” for margin or cash to back trades.

The EU requires a two-day period, a difference critics say ties up far more capital.

ESMA said it was proposing that both systems could be used in the EU, a step that would make it possible for the bloc to recognize U.S. rules as being “equivalent” in terms of strictness to the bloc’s system.

“Overall, ESMA believes that the drawbacks do not outweigh the benefits to introduce such type of account structure in the European regulation to ensure a level playing field with other jurisdictions,” the EU watchdog said in a statement.

“In addition, to limit the risks that a reduction of the liquidation period might have for central counterparties, they should collect intraday margins,” ESMA added.

The watchdog will consult with the industry on the draft change before sending a final proposal to the EU’s executive European Commission for approval into law later this year.

Banks based in the European Union would have to hold more capital against trades cleared through non-EU clearing houses whose rules are not deemed to be equivalent.

The Commission on Friday extended until June the grace period for EU banks to continue using U.S. clearing houses without having to hold extra capital.

Monday’s announcement follows a discussion paper issued by ESMA in August after it became clear the United States was not going to change its own rules, insisting they are better.

Reporting by Huw Jones; Editing by Mark Potter