ESMA grants equivalence to 10 APAC CCPs
The European Securities and Markets Authority (ESMA) has granted equivalence to 10 Asia-Pacific (APAC) central counterparty clearing houses (CCPs), thereby allowing third country CCPs to provide clearing services to EU clearing members and trading venues.
The CCPs include ASX Clear, HKFE Clearing Corporation, Hong Kong Securities Clearing Company, SEHK Options Clearing House, Japan Securities Clearing Corporation and Singapore Exchange Derivatives Clearing.
Equivalence is important since it means that European banks clearing their trades via CCPs in equivalent jurisdictions can do so without the need for added compliance burdens, since their domestic regulator (ESMA) recognises the jurisdiction in which they are trading as being up to an equivalent standard as regards the regulatory framework. For example, a European bank clearing trades at a Japanese CCP can do so within a similarly robust safety framework as it does at an approved European CCP – according to ESMA’s view.
If banks are using Qualified CCPs (QCCPs), those approved by ESMA in Europe, then the banks can subject their trades to a two per cent risk-weighted capital charge. If they are clearing through a CCP that is not recognised by ESMA, then this capital charge leaps up. This is to reflect the greater perceived risk exposure generated via clearing at a non-QCCP.
However, equivalence has yet to be attained between the EU and US. The major point of difference between the two regulators is around margin requirements at CCPs, with Europe having imposed a tougher margining framework than the US. It therefore carries over that they will need to hold increased capital on their balance sheets against trades conducted at non-QCCPs in order to mitigate the failure of that CCP, something deemed to be more likely by ESMA than at those CCPs it recognises.
If equivalence is not reached by the middle of June 2015, the EU may have to delay its new capital requirement rules as the cost for European financial institutions clearing through US CCPs could become exceptionally expensive. The CME Group recently told the House of Representatives that the Commodity Futures Trading Commission (CFTC) had to find common ground with the European Commission on equivalence.
