The European Commission (EC) and the US Commodity Futures Trading Commission (CFTC) have agreed on common rules for central clearing counterparties (CCPs).

The agreement, announced on Wednesday, 10 February, will ensure that European CCPs will be able to do business in the United States more easily and that US CCPs can continue to provide services to EU companies.

“This is an important step forward for global regulatory convergence. It means that European CCPs will be able to do business in the United States more easily and that US CCPs can continue to provide services to EU companies," said Jonathan Hill, Commissioner for Financial Services, Financial Stability and Capital Markets Union.

Steps to reach equivalence

The steps to implement this agreement are as follows:

• Both the EC and the CFTC will adopt decisions of equivalence and comparability.
• Once this is done, the European Securities and Markets Authority (ESMA) will be able to recognise US CCPs and US CCPs may continue to provide services in the EU whilst complying primarily with their own local requirements.
• Likewise, the CFTC's determination of comparability will permit EU CCPs to provide services in the US while complying primarily with their own local requirements.
• The CFTC will also streamline the registration process for EU CCPs wishing to register with them.

The agreement on this common approach has taken three years of discussions to complete. According to the EC, a common approach to the regulation and supervision of global derivatives markets is critical to supporting cross-border trade and investment and maintaining financial stability.

Response to financial crisis

Following the 2008 financial crisis, G20 leaders recognised the importance of CCPs in mitigating risks in the financial system and made it obligatory for standardised derivatives contracts to be cleared through a CCP. The CCP guarantees the obligations of each counterparty to a transaction.

Financial disruption averted

ISDA's chief executive Scott O'Malia, a former CFTC commissioner, said: “There was a risk of real market disruption had this not been resolved. Hopefully, this paves the way for other equivalence decisions to be taken - for example, on trading platforms and margin rules - in a quicker time frame.”

The US and EU are home to the largest derivatives markets in the world. According to Bank of International Settlements (BIS) statistics, the global over-the-counter (OTC) derivatives market's notional outstanding amount was $553 trillion in the first half of 2015.