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EU=US at last- CCP Equivalence announced

The EU and the US have today released a joint statement outlining a common approach to mutual recognition of each other’s CCPs. ESMA will propose an equivalence decision in respect of US CCPs, the CFTC will propose a “determination of comparability” in respect of EU CCPs- each decision will conclude at the same time that the other jurisdiction’s rules are essentially equivalent/comparable.

CCPs from each jurisdiction will be able to continue offering services, US CCPs will become QCCPs evading the punitive capital charges consequent on failure to qualify. Although the initial stament is light on detail, as expected the major changes have been on the EU side:

  • Initial margin for clearing member’s proprietary position will be calculated using a 2 day liquidation period
  • Initial margin models will include measures to mitigate procyclicality
  • “Cover 2” default resources will be maintained- allowing for the simultaneous failure of a CCP’s two largest members
  • ESMA’s recent proposal to apply an alternative standard for client margining will be rapidly addressed (and by implication applied)

CFTC Chairman Massad released a short statement of welcome for the transatlantic concord, Commissioner Giancarlo typically criticised both sides for subjecting each other’s rules to letter rather than spirit of the law super-scrutiny. It is hard to disagree with Commissioner Giancarlo on this issue, the frontloading obligation under EMIR begins a mere seven days away on the 21 February 2016. The Bank of England recently concluded that swap market liquidity had become geographically fragmented as result of differing regulations. Transatlantic equivalence, the major chance to repair this damage should never have been subject to the unpalatable display of political brinkmanship which this statement ends.

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