Europe and US fail to agree on derivatives rules

The two main regions for derivatives trading have failed in their latest push to harmonise industry rules, with US and European regulators aiming to settle a long-running spat by the summer.

Talks in Brussels between Jonathan Hill, the European Commissioner for financial stability, and Timothy Massad, chairman of the US Commodity Futures Trading Commission (CFTC), concluded on Thursday, with no agreement reached over the recognition of each region's rules on clearing houses.

The risk management houses have become a keystone of post-financial crisis reforms of the derivatives market. Policymakers have pushed for risks associated with swaps deals to be pooled into a central counterparty, with the clearing house standing between banks, asset managers and hedge funds, guaranteeing trades and mutualising losses.

Attempts to harmonise the rules and prevent banks and hedge funds from moving to the jurisdiction with the most favourable treatment - thereby splitting the market - have been running for two years, with no sign of a resolution.

After talks ended on Thursday, the US and EU officials released a joint statement: "Discussions are constructive and progressing. They have been mutually satisfactory on the issue of the ability for both sides to potentially defer to each other's rules.''

The two sides hoped to finalise a joint approach by the summer, they added.

Mr Massad's two-day trip to Brussels has also featured his first appearance at the European parliament, where the sometimes-tetchy relations between the US and Europe in recent years were again played out in public.

Patrick Pearson, a senior official within Lord Hill's department, said the EU was focused on reducing systemic risk whereas the CFTC's priority was investor protection of clients. Mr Massad countered: "The notion that we don't care about big banks and the risks they pose, I find, just simply isn't true."

The two sides have been analysing data from two transatlantic clearing houses to help finalise a deal, but both sides have yet to reach agreement on the findings. The EU has previously argued that the CFTC's approach is less stringent.

However during his trip, Mr Massad argued the biggest difference between the two sides lay in the margin that had to be put up for derivatives trading by the customers of clearing members. The funds are the first line of defence when a customer defaults, used to make payments and insulate the other clearing members from also defaulting.

Under US rules, clearing houses would have to hold $58bn in initial margin for futures trading. European rules meant the clearing house would have held only $23bn, Mr Massad said.

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