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Take your partner for the Article 39 three step

Prompted by yesterday’s authorisation of LCH. Clearnet Ltd. and perhaps by the “no exemptions” comment by a CFTC official, the FCA has suggested a convoluted workaround for EU CCPs who are caught in the US client asset catch 22. Article 39 EMIR, as clarified by Question CCP 8i ESMA Q&A, stipulates that a European CCP must offer all its clients the account choice of omnibus or individual segregation. However, if a client is a US person, both options fall foul of US rules- Dodd-Frank mandates LSOC and individual segregation contravenes US bankruptcy laws.

In communication with the FIA, the FCA proposes the following “solution”:

  • Step 1: clearing member offers the US Person the choice mandated by Article 39 EMIR
  • Step 2: US Person rejects the offer in writing on the grounds that as a US Person, he/she is obliged to clear through an FCM
  • Step 3: clearing member offers the services of its US affiliate

Step 1 fulfils the clearing member’s Article 39 obligation to offer the mandated choice, step 2 fulfils the Article 39(5) requirement for the client to confirm their election in writing, step 3 actually gets the trade cleared. The “EMIR evasion” clearly hinges on the availability of the US affiliate. In light of the above, the FCA has indicated to the FIA that:

  • It expects compliance with Article 39 in respect to European clients “very quickly”
  • It is open to argument that that compliance in respect to non-European clients is more difficult and may take longer to achieve

It is difficult to decide if the above proposal is ingenious, farcical, or a mixture of both; either way, it is a swift and (relatively) pragmatic solution to a pressing problem and the FCA should be congratulated for that at least. The Article 39 teacup-storm is merely the most current of many issues raised by US-EU (and no doubt soon to be others’) lack of concord. A permanent solution can only be achieved by tearing up both rulebooks and starting again (unlikely in the absence of an intervening Financial Crisis 2.0), or an unprecedented outbreak of amity among leading regulators.

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