New SEC standards may level playing field for European banks

Philip Stafford | Financial Times

A gap in transatlantic regulation of securities trading that threatened to handicap European banks may soon be closed following a ruling by US markets regulators.

The Securities and Exchange Commission on Wednesday finalised new standards that may allow investors in Europe to trade critical US markets such as equities, options and Treasuries, on a similar playing field to American counterparts.

New rules will tighten risk management at clearing houses Options Clearing Corporation and Depository Trust & Clearing Corporation and force regular reviews of systemically important market institutions.

Mary Jo White, chair of the SEC, said the proposals “would further strengthen the national system for clearance and settlement and help to further mitigate risk to the broader US financial system”.

Their formal approval will allow European regulators to begin to assess whether the US rules are harmonised with their own. Global policymakers have sought tougher common standards since the financial crisis.

Without the recognition, European banks face tougher local capital rules for trading and clearing US securities, which would also damage US-based businesses. The industry has estimated it could cost them an extra $5bn in capital requirements.

“We were supportive of it and had every expectation the final rule would be close to the proposal. As soon as the [European] Commission has a chance to look at it, it can form the basis of an equivalency decision,” said Mark Wetjen, head of global public policy at the DTCC, on the sidelines of the Sibos conference in Geneva. Even so, he pointed out: “For implementation, it’s still an ambitious timetable.”

Europe has until mid-December to approve both the rules and the main clearing houses, although previous deadlines have been pushed back.

“We are pleased the SEC has approved the clearing agency rules, as this was an important priority for OCC and the US-listed options industry,” said Craig Donohue, chief executive of the OCC.

The equivalency issue would hit 13 members of DTCC’s fixed-income clearing house and about 20 per cent of its volume. It has average daily clearing volumes of more than $3tn.

The OCC has estimated there are 18 EU- affiliated clearing members of OCC, which account for about a fifth of the open interest at the clearing house. CBOE Holdings, the Chicago exchange, has estimated that around half the futures volume at OCC in the Vix index, a popular volatility measure, would be affected.

The US and Europe agreed a deal for derivatives clearing in February but the deal did not include securities as they are regulated in the US by the SEC. However S&P, the credit rating agency, has warned DTCC may need to raise extra capital if EU regulators demanded the same conditions as they negotiated with the Commodity Futures Trading Commission.

At the same meeting the SEC decided to mandate that US broker-dealers settle trades in two business days after the deal, compared with the current standard of three days.

Read the full article in the Financial Times here.