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Futures Industry Association Publishes Letter Opposing Relocation of Euro-Denominated Derivatives Clearing

On June 6, the Futures Industry Association (FIA) published a letter addressed to European Commission (EC) Vice–President Valdis Dombrovskis, detailing its concerns about the potential approach of forced relocation of euro-denominated derivatives clearing to the European Union. Forced relocation was raised as an option for ensuring the protection of the financial stability and monetary policy of the European Union in the EC’s May 2017 communication on certain challenges for critical financial market infrastructures and for further developing the Capital Markets Union.

FIA states that relocation would be the most disruptive and expensive approach to overseeing third-country central counter-parties (CCPs), without improving the oversight of this activity. It opposes relocation for the effects it will have on the derivatives markets, including:

  • Fragmentation. FIA states that fragmentation of the market would result in the creation of two distinct pools of trading liquidity, one offshore with the majority of euro-denominated swaps traded by foreign institutions and a smaller and less-liquid on-shore pool for swaps traded by EU institutions. This small pool could impact a CCP’s ability to successfully port or auction client positions of a defaulting clearing member and increase systemic risk.

  • Weakening the stability of the EU. FIA points out that a key part of promoting financial stability through the use of CCPs is having a significant pool of clearing members available to accept clients or positions from a defaulting clearing member. As well as the already-declining number of clearing firms, a location policy could increase concerns around the market’s ability to absorb clients of a defaulting clearing member.

  • Costs for end-users. FIA believes that the fragmentation of clearing among multiple CCPs would reduce the benefits of portfolio margining; risk offsets would be lost and end users would have to post more margin to accommodate this heightened risk, estimated to be as much as an additional $77 billion. End users would also face higher execution costs due to lower volumes and a reduced number of market participants.

FIA instead supports the EC’s use of recognition and enhanced supervision as being a more effective and less disruptive way to protect financial stability. They note that the European Union has been a leader in developing “equivalence” regimes for third countries, which have the ability to raise standards to meet those of the European Union. The letter ends by recognizing that further enhancements between EU and UK supervisory authorities may be needed after Brexit, but that history has shown that a location policy is not needed to meet their intended regulatory objectives.

The letter is available here.

©2017 Katten Muchin Rosenman LLP

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About this Author

David A. Brennand, Financial Services Lawyer, Katten Muchin Law Firm
Partner

David Brennand is a partner in the Financial Services practice in Katten Muchin Rosenman UK LLP. David provides advice to a wide range of clients active in asset management on a broad spectrum of matters pertinent to their operations, with a particular focus on advising asset managers on the structuring and ongoing operation of hedge and other alternative fund structures investing in a diverse range of asset classes.

As well as advising on fund structuring and their ongoing operation, David's expertise also extends to advising asset managers and...

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Carolyn H. Jackson, International Attorney, Katten Muchin law firm
Partner

Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws and regulations. 

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Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
Senior Associate

Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring...

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Neil Robson, private equity fund managers counselor, Katten Law Firm, London
Partner

Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...

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