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US treasury help sought in cross-border swaps dispute


Added on 27/03/2015

Senate Agriculture Committee Chairman Pat Roberts (R, Kansas) is pressing the Obama administration to help resolve a protracted cross-border dispute over derivatives regulation, a fight that threatens to harm big US firms like CME Group Inc that fall under the committee’s oversight, reports the Wall Street Journal.

Mr Roberts, whose panel has jurisdiction over derivatives markets, is asking the US Treasury Department to help resolve a dispute over the cross-border treatment of clearinghouses—entities that are supposed to help prevent a market-wide collapse by ensuring either party in a derivatives transaction would get paid if the other side falters.

“I would appreciate your attention to this matter and urge you to work to resolve this issue,” Sen. Roberts wrote in a recent letter to Treasury Secretary Jacob Lew, review by The Wall Street Journal.

The entities, which include CME and Intercontinental Exchange Inc., are required to register with their home-country regulators in the US and Europe, and global regulators are working to establish a system to ensure that home-country rules are “largely equivalent” across borders.

But European policy makers are so far resisting blessing US clearing regulations as “equivalent,” as they have done with rules in Japan, Hong Kong, Indian and other countries. Without that determination, European banks that choose to clear their trades in the US may have to significantly increase the amount of capital they hold to protect against default, a move industry officials say would be too costly. The new capital requirements are set to go into effect in June unless European officials delay them, as they have already done twice.

A Treasury spokeswoman confirmed receipt of the letter but declined to comment.

To date, the negotiations are largely between the European Union’s financial-services chief, Lord Jonathan Hill, and Commodity Futures Trading Commission Chairman Timothy Massad. European policy makers raising multiple objections to declaring US rules for clearinghouses as equal to their own, according to people familiar with the deliberations.

A key sticking point in the negotiations involves technical differences in how the two jurisdictions calculate requirements for margin, or the amount of cash or securities needed to backstop trades. Each side argues its method is more robust than the other. The cushion is over one day in the US and two days in Europe.

Mr Massad said earlier this month that the CFTC has made “great progress” in resolving the clearinghouse spat, saying the CFTC has agreed to a European request to make some of its rules more “harmonized” with those in Europe but he declined to identify which rules. “It’s not like it’s going to be a significant change,” he told reporters. “We’ve agreed to do a lot of what they requested.”

Still, industry officials said the dispute doesn’t appear to be near any resolution. Terry Duffy, executive chairman of CME Group, has characterized the issue as a trade war and told House lawmakers Wednesday that the US should restrict European clearinghouses from the American markets.