In a letter addressed to Valdis Dombrovskis, vice president of the European Commission, FIA president Walt Lukken noted the importance of protecting financial stability, but suggested that forced relocation of euro-denominated cleared derivatives would be “the most disruptive and expensive approach to overseeing third-country central counterparties (CCPs), without improving the oversight of this activity.”
The letter came as a response to a European Commission communication issued on 4 May, which suggested that further safeguarding of the financial system is required, and that this could include increased supervision of euro clearing and forced relocation.
In the communication, the European Commission said: “In view of the challenges in the area of derivatives clearing, further changes will be necessary to improve the current framework that ensures financial stability and supports the further development and deepening of the Capital Markets Union.”
It went on: “Specific arrangements based on objective criteria will become necessary to ensure that, where CCPs play a key systemic role for EU financial markets and directly impact the responsibilities, including financial stability and monetary policy, of EU and member state institutions and authorities, they are subject to safeguards provided by the EU legal framework.”
“This includes, where necessary, enhanced supervision at EU level and/or location requirements.”
The FIA, however, said it has “grave concerns” about this approach, arguing that forced relocation would “fragment these markets, raise costs for end users, and weaken the stability of the financial system.”
The letter went on: “The location of clearing activity should be driven by legitimate market forces operating within a regulatory framework suited for a global market.”
It suggested that forced relocation would lead to fragmentation between euro-denominated derivatives cleared in the EU non-euro denominated derivatives, which will likely continue to be traded outside of the EU. This would “have an adverse effect on systemic risk”, the letter said.
In a statement, Lukken added that forced relocation would be detrimental to end users “that rely on these markets for hedging and managing their exposure to risk”, and suggested that the required security in clearing could be achieved through improved oversight and recognition alone.
He said: “FIA believes that the commission’s suggestion of recognition and enhanced supervision are more effective ways to protect financial stability than forced relocation of the clearing of euro-denominated products.”