The CFTC and the European Commission agreed on a framework to recognize each other’s clearinghouses, central clearing counter-parties (CCP’s), as subject to the same regulatory oversight. The question comment from many traders is likely to be, “So what”. Well, this is a big deal. If this was not done, then US clearinghouses would not be qualifying CCPs under EU law. The impact would be that European banks carrying positions there would be subject to a penalty capital charges.
Nevertheless, we believe that this accord will have a strong impact on futures customers and the result will not good. Costs will go up either through increases in margin required, shuffling of FCM players, or implicit expenses because the FCM will have higher costs. Having house accounts hold more margin will make being a prop trading clearing firm more expensive. It is not clear that holding two-day margin will protect the market in a crisis. There is also a carve-out for agricultural positions. Having more pro-cyclicality in margin models is not easy to solve except by raising margins. Forcing "cover 2" default resources means that DCOs will want to have less FCM concentration. They should want to make being large more expensive. More diversification of FCM is good but in the near-term smaller clients of the largest FCM may be at risk.
The law of unintended consequences will show itself as these rules are implemented.