U.S. watchdog urges EU to think through euro clearing changes

[May 10, 2017]  By Huw Jones

LONDON (Reuters) - The European Union should think carefully before forcing through any changes to where clearing of euro-denominated securities like derivatives and bonds is located after Brexit, the top U.S. derivatives regulator said on Wednesday.

Brussels is looking at whether euro-denominated clearing, an activity dominated by London, should be moved to the single currency area after Britain leaves the bloc in 2019.

Christopher Giancarlo, acting chairman of the U.S. Commodity Futures Trading Commission, told the annual conference of global derivatives industry body ISDA that he was respectful of the fact that "this is an important regulatory policy decision that needs to be made with care by European officials."

The issue is politically sensitive at a time when Britain and the EU embark on divorce talks, with legislative proposals on clearing due from Brussels next month.

Giancarlo also drew attention to the European Commission's consideration of a less radical option than moving clearing from London, which would involve tighter supervision of foreign clearing houses that handle large amounts of euro clearing.

A clearing house or central counterparty (CCP) stands between two sides of a trade, ensuring its completion even if one side goes bust.

The CFTC has a lot of experience in the supervision of clearing houses both in the United States and abroad, Giancarlo said.

"We welcome the opportunity to discuss the CFTC's experience with officials in Europe."

"To date, the US has not deemed a body of water – even as large as the Atlantic Ocean – as an impediment to effective CCP supervision and examination," he said.

He also said that given the closeness of the U.S. and European derivatives markets, what Europe decided "undoubtedly will inform the evolution of U.S. regulatory policy for cross-border swaps clearing."

Detail of a European map, including Great Britain, is seen on the face of a Euro coin in London, Britain, January 31, 2016. REUTERS/Toby Melville

Giancarlo called for changes to the "supplemental" leverage ratio, or SLR, that the world's top banks must comply with.

The SLR, designed by global regulators, is based on a "flawed understanding" of how clearing works and harmed market liquidity, he said. A leverage ratio is a measure of capital to a bank's assets on a non-risk weighted basis.

Giancarlo said the SLR should not include cash posted by bank's customers to back trades, and changes could contribute to a big saving in capital costs for banks, and potentially a three-fold increase in trading activity.

It was critical that global regulators check if rules introduced since the 2007-09 financial crisis have made the financial system effective in supporting growth, he said.

"Flourishing capital markets are the answer to global economic woes, not diminished trading and risk transfer."

(Editing by Jane Merriman and Alexander Smith)

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