ESMA May Reduce EU Derivatives Margin Period Leading to Equivalence for US Clearing Regime | Practical Law

ESMA May Reduce EU Derivatives Margin Period Leading to Equivalence for US Clearing Regime | Practical Law

The European Securities and Markets Authority (ESMA) has published a consultation paper that proposes a change to margin requirements at EU derivatives clearinghouses. The change could allow the US derivatives clearing regime to be considered as an EU-equivalent clearing regime, paving the way for a long-awaited US-EU agreement on derivatives clearing harmonization.

ESMA May Reduce EU Derivatives Margin Period Leading to Equivalence for US Clearing Regime

by Practical Law Finance
Published on 04 Feb 2016 • USA (National/Federal)
The European Securities and Markets Authority (ESMA) has published a consultation paper that proposes a change to margin requirements at EU derivatives clearinghouses. The change could allow the US derivatives clearing regime to be considered as an EU-equivalent clearing regime, paving the way for a long-awaited US-EU agreement on derivatives clearing harmonization.
On December 14, 2015, the European Securities and Markets Authority (ESMA) published a consultation paper (ESMA/2015/1867) that proposes a change to derivatives margin requirements at EU clearinghouses. The change could allow the US derivatives clearing regime to be considered an EU-equivalent clearing regime, paving the way for a long-awaited US-EU agreement on derivatives clearing harmonization.
Currently, a critical difference between the US and EU derivatives clearing regimes relates to the margin period of risk (MPOR) for cleared financial instruments that are executed on an exchange. For US CCPs, the MPOR for these instruments is one day, applied for client accounts on a gross basis. Under the EU regime, the MPOR is two days, but margin may be provided on a net basis.
The European Commission (EC) has requested comment from ESMA on its view of the proposed Article 26 revision. Article 26 sets out the definition of the time horizons for the EU liquidation period. This revision would allow CCPs authorized under EMIR to apply a one-day liquidation period for cleared financial instruments for gross omnibus accounts and individual segregated accounts for exchange-traded derivatives and securities, as in the US.
US and EU regulators have been discussing harmonization of their clearinghouse regulations since 2013 because clearinghouses, their clearing members, and end users of cleared derivatives have encountered increased costs associated with complying with two sets of regulations, under the Dodd-Frank Act in the US and EMIR in the EU (see Legal Update, Further Delay for CFTC-EU Agreement on Derivatives Clearing Rules).
Europe is set to begin mandatory swap clearing in June 2016 (see Legal Update, European Swap Clearing to Start in June 2016). The consultation ran through February 1, 2016. Depending on the outcome of the consultation, ESMA will submit a final report amending the draft RTS to the EC. Before finalizing its draft, ESMA will consult with the European Banking Authority (EBA) and the European System of Central Banks (ESCB).
For an overview of EMIR (the Regulation on OTC derivative transactions, CCPs, and trade repositories (Regulation 648/2012), see Practice note, EMIR: Overview.