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EU moves to bridge gap with US on derivatives clearing rules

[LONDON] European Union regulators proposed to amend rules on central clearing of derivatives trades in a bid to end a long-running dispute with the US that threatens to fragment markets.

Central clearing companies stand between traders, holding capital and collateral to ensure losses at a trading firm don't harm its counterparties. They're seen by regulators as a firewall to prevent a repeat of the 2008 crisis, when interconnections between firms threatened the financial system. The EU-US dispute is over how much collateral - known as initial margin - should be put up when a trade is initiated.

The European Securities and Markets Authority proposed to reduce the amount to cover potential losses to one day's activity on a position, as in the US, from two days as is currently the situation in Europe. The rules would apply to gross omnibus accounts and individual segregated accounts for exchange-traded derivatives and securities.

Derivatives traders have been seeking an agreement to be reached between the US and Europe because a failure for the two sides to recognize each other's regimes could hurt EU banks, which would have to hold more capital for cross-border trading. It may also undermine the competitiveness of clearinghouses if they're disadvantaged by their home country's rules.

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Last week, the EU prolonged a transition to new capital rules on how banks and their subsidiaries handle their exposure to central counterparties. The extension to June 15 allows more time for companies to adjust to the new rules because clearinghouses in the EU and in other countries need more time to go through the process of being authorized or recognized under the European Market Infrastructure Regulation.

ESMA's consultation ends on Feb 1, 2016.