Extension of QCCP Deadline Shows EC and SEC Are Working Together To Achieve Common Approach on Equivalency

Craig S. Donohue
June 17, 2016
By Craig S. Donohue ,Chairman

At OCC, we take seriously our role as a Systemically Important Financial Market Utility (SIFMU), and we advocate on behalf of the U.S. listed options industry to provide our exchanges and clearing firms with a strong and competitive marketplace.

In February, the U.S. Commodity Futures Trading Commission (CFTC) and the European Commission (EC) announced an agreement on a common approach for the regulation of cross-border central counterparties (CCPs). In March the EC released its equivalence determination for the CFTC's CCP regulatory regime. OCC submitted its recognition application to the European Securities and Markets Authority (ESMA) under the European Market Infrastructure Regulation (EMIR) process in 2013, and the application has been deemed complete by ESMA.

For OCC's application to be eligible for approval, the U.S. Securities and Exchange Commission (SEC) must reach an agreement with the EC regarding an SEC Equivalence Determination. We commend the EC for its recent decision to extend the transitional period deadline for CCPs such as OCC to be recognized as qualified central counterparties (QCCPs). We believe this announcement is an important indication that both sides are continuing to work through the issues and arrive at a common approach. We look forward to continuing to work with the EC, ESMA and the SEC as they endeavor to come to an agreement on a common approach for the regulation of cross-border QCCPs.

Recognition of U.S. CCPs subject to the SEC's jurisdiction is important to OCC and market participants for several reasons, foremost among them that it would allow EU banks' and EU bank affiliates' exposure to those CCPs to be subjected to a lower risk weight in calculating their regulatory capital. Without such recognition, a CCP cannot admit firms established in the European Union (EU) to membership. It cannot clear for trading venues established in the EU, nor can it clear products subject to the clearing mandate for market participants established in the EU. OCC's EU affiliate clearing members' risk weighted asset exposures to OCC would increase to over $75 billion from approximately $924 million, requiring them to maintain additional capital of approximately $5.25 billion.

There are currently 18 OCC clearing firms classed as EU-affiliated firms that potentially would be impacted by the lack of QCCP recognition for OCC. They represent about 17 percent of OCC cleared volume and 21 percent of open interest. These firms also contribute significantly to OCC's financial safeguards framework: about $9.5 billion (25 percent) in initial margin held by OCC, and about $3 billion of our clearing fund (25 percent). Outside of OCC's equities options business, about 50 percent of all VIX futures volume that is cleared by OCC members would be impacted.

As the only CCP in the U.S. for the listed equity options markets, the imposition of punitive capital charges on OCC's EU-bank affiliate clearing members will trickle down to exchanges and market participants, and would adversely impact the entire marketplace. For example, if certain of these EU-bank affiliates could no longer serve as an OCC clearing member, other market maker clearing members of OCC would not be able to absorb the impacted market makers. Liquidity provisions in the options markets could be significantly impacted, resulting in increased spreads, greater volatility, and higher trading costs for investors.

Final rules from the SEC that align the regulatory regime for CCPS that are systemically important with the standards that are in place by other U.S. regulators, as well as with international regulatory regimes, would be beneficial to U.S. financial markets. In addition to avoiding the potential market disruptions, these rules also would pave the way for impacted CCPs to further enhance their resiliency.

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