A new law of European Union requiring closer scrutiny of foreign clearing houses used by customers from the bloc has been simplified after the United States threatened retaliation.
The law was triggered by Britain’s departure from the European Union as the London Stock Exchange’s LCH clears the bulk of interest rate swaps denominated in euros. U.S. regulators threatened retaliation if Brussels began to closely supervise U.S. clearers, such as CME Group and ICE (Intercontinental Exchange), saying it would increase their costs.
Brussels had dismissed the threats as blackmail, but proposals for implementing the law published by the European Commission on Thursday rejected the catch-all approach recommended by the European Securities and Markets Authority (ESMA), the EU watchdog that will supervise foreign clearers.
The commission, the EU’s executive, said its proposals streamlined and simplified ESMA’s approach, making it easier and cheaper for foreign clearers to predict the level of supervision.
The Commodity Futures Trading Commission (CFTC), the U.S. regulator that had threatened retaliation, said the proposals were a positive step that balanced the need to maintain EU financial stability with deference to the home regulator of U.S. clearers.
With deference a “two-way street”, the CFTC would continue to consider how it can show further deference to the EU, as appropriate, CFTC Chairman Heath Tarbert said. CME declined to comment, and ICE had no immediate comment. Foreign clearers used by EU customers will fall into two tiers with different levels of supervision.
A clearer will only have to give ESMA the sort of access usually reserved for domestic regulators if it is deemed to be systemic. Otherwise, it will only have basic ESMA supervision. A clearer will be deemed systemic if it clears more than a trillion euros of securities transactions denominated in EU currencies in a year, or its notional outstanding amount of swaps positions exceeds a trillion euros.
Lawmakers from the U.S. House of Representatives’ sub-committee on commodity exchanges said the proposals addressed substantive concerns by clarifying that U.S. clearers will not be deemed systemic and therefore spared greater scrutiny.
The sub-committee had made it clear it would not accept any form of EU control over U.S.-based clearers, they said. The EU has long wanted euro clearing to be based in the bloc rather than predominately in London and long-term EU access for the LCH has still to be determined.