Timothy Massad on European Clearing Equivalence: 'Cleaning Up The Spider-Web of Opaque Complexity'

CFTC Chairman Timothy Massad addressed the Futures Industry Association on March 16, offering more detail on the historic agreement with the European Commission on cross-border clearinghouse recognition. The example was used to illustrate the CFTC’s ongoing efforts to remove regulatory complexity and maintain stability in global financial markets.

Cross-border clearing equivalence has been a hot-button issue for market participants and regulators in the U.S. and Europe, one that Massad has repeatedly stressed a top priority. With the agreement, the CFTC and European Commission have agreed to recognize one another’s clearing requirements, easing uncertainty around cross-border trading between market participants. 

In the speech, he outlined the final specs of the agreement and explained how the deal has become a blueprint for further collaboration with European regulators:

• Modest Changes on Both Sides of the Atlantic: Revisions to clearing requirements are being made in the U.S. and Europe. For example, European central counterparty clearinghouses (CCPs) will likely have to follow the U.S. regulatory model governing the collection of customer margins, while U.S. CCPs will need to comply with the European requirement for two-day liquidation periods for house margins. 
• Substituted Compliance with EMIR:  The CFTC has already fulfilled a “substituted compliance” determination that will permit European CCPs to comply with many of the U.S. rules by adhering to the corresponding European Market Infrastructure Regulation (EMIR) requirements. 
• Next on the Agenda – Cross-Border Margin Rule Harmonization: With the success of the U.S./E.U. clearing equivalence accord under their belts, the CFTC is now turning its attention to margin rules for uncleared swaps. The final U.S. rules were developed late last year with an eye toward consistency with global standards, and the CFTC will soon propose cross-border application of the U.S. rule in Europe and Japan. 

Massad also discussed the agency’s work on global clearinghouse resiliency and clearing member customer protections in the event of a market shock. Ultimately, he proffered the message his agency is working hard to protect markets without getting in the way of their efficient operation. In his own words, Massad described his role as: “cleaning up the spider-web of opaque complexity that arose from the bilateral OTC world, complexity that threatened to lead to domino-like defaults in the crisis.”

Read his full speech here.