EU plays catch-up on swaps collateral under US pressure

[LONDON] European Union regulators are considering ways to speed the implementation of collateral requirements for derivatives as the bloc's failure to meet a global deadline threatens to fracture the US$493 trillion market.

The European Commission said last month it wouldn't meet a Sept 1 global deadline. In a draft letter addressed to the main EU regulators, the bloc's executive arm is now proposing to adapt its plans to "align with the internationally agreed timelines as closely as possible."  Previously, the commission said it would finish EU technical rules on margins for non-centrally cleared over-the- counter derivatives by year-end and have them take effect by mid-2017. That prompted a backlash from regulators in Washington and Tokyo, who said they intended to impose the rules on schedule, while leaving the door open to a delay.

The regulations will apply billions of dollars in collateral demands to swaps traded by the world's largest banks, including JPMorgan Chase & Co, Barclays Plc and Deutsche Bank AG. The financial industry has called for global regulators to enforce the requirements at the same time to avoid creating the potential for regulatory arbitrage between jurisdictions.

The Basel Committee on Banking Supervision, which includes regulators from around the world, helped set the international deadlines that start taking effect for the biggest banks in September and ratchet up starting in March 2017. The over-the- counter swap market is estimated at US$493 trillion by the Bank for International Settlements.

In the undated draft letter seen by Bloomberg, the commission proposed that the requirements would take effect one month after the EU's technical rules enter into force. Subsequent start dates in the global agreement would be maintained as long as EU rules enter into force in time.

There is no firm timeline for completing the EU rules. A commission spokeswoman declined to comment on the draft letter.

The timing gap threatens to raise competitive pressures, since US banks will need to comply with the requirements earlier than European rivals. This divergence could discourage trading between US and European banks in the interim and make it more expensive for US banks.

BLOOMBERG