New barriers to international clearing could be erected by proposed new regulations for over-the-counter (OTC) derivatives in the European Union, according to the Alternative Investment Management Association (AIMA), the global hedge fund association.
AIMA, which strongly supports mandatory central clearing of eligible OTC derivatives contracts, is calling on EU lawmakers to reconsider a key provision of the European Market Infrastructure Regulation (EMIR), the proposed future regime for mandatory clearing of OTC derivatives in the EU. This provision could in effect exclude EU-established financial services providers from using central counterparties (CCPs) which are not located in the EU, according to AIMA.
AIMA’s call to adjust the part of EMIR relating to third country CCPs comes at an important stage in the process of finalising the text of the legislation. The European Parliament’s Economic and Monetary Affairs (ECON) Committee is scheduled to vote on the issue on 24 May.
In the European Parliament’s draft text, a third country CCP would only be permitted to provide clearing services to EU entities if those entities obtained an authorisation in each individual EU Member State. Furthermore, the third country CCP would only be allowed to obtain such an authorisation if the European Commission recognised that the legal and supervisory arrangements of its home jurisdiction were “equivalent” to those contained within EMIR.
The EP has also added various other conditions which third country jurisdictions must meet in order for their CCPs to be able to obtain an EU authorisation and which are not related to the prudential regulation of CCPs.
Taken together, AIMA believes it could be difficult for many third countries and their CCPs to meet these criteria given the differences between the requirements on CCPs, clearing members and clients.
AIMA CEO Andrew Baker said: “AIMA is supportive of open international markets and opposes measures which could result in the erection of unjustifiable barriers to international trade. We believe it is important that, in particular, counterparties in the European Union and the US can still trade freely and use each other’s financial services. We believe that it is important that the international nature of the OTC derivatives market is maintained and that any unnecessary restrictions on international trading are avoided.
“What is particularly troubling about these proposals is that they go beyond OTC clearing and could potentially capture CCPs which clear shares or bonds. If that were the case, we would need hundreds of equivalence decisions or face the possibility that EU financial services providers would not be able to trade abroad. We would encourage representatives of the different European bodies to meet with non-EU regulators in order to find pragmatic solutions on recognising third country central counterparties in Europe as well as to limit clearly the scope of this to the G20 agreement on OTC derivatives.”
Globally, new rules governing OTC derivatives need to be implemented by the end of 2012 in order to meet a timetable agreed by the G20.