By HAL S. SCOTT
Originally published by Financial Times on July 24, 2013
Philip Stafford’s article “EU-US swaps trading deal is not the end of the story” (Quick View, FT.com, July 16) and my recent op-ed in the Wall Street Journal (“Land Mines in the Derivatives ‘Path Forward’”) agree that the regulation of systemically important clearing houses is the most important aspect of derivatives regulation, and that key differences remain between EU and US clearing house rules that relate to the ability of these clearing houses to withstand a financial crisis.
However, there is a disparity between our two articles regarding the amount of collateral that EU banks and US banks will have to post to these clearing houses to protect against losses. The minimum margin requirements for EU and US clearing houses are highly important, as they will require EU and US banks to post hundreds of billions of dollars in collateral for derivatives transactions.
Mr Stafford asserts that for derivatives the EU rules require an EU bank to post sufficient collateral to protect against losses that could be incurred over two days, whereas the US rules require US banks to post only one day’s worth of margin. This lacks specificity, as the margin requirements depend on the type of derivative.
For the all-important interest rate swaps, the EU rules could require only two days of margin to be posted. Regardless of the standardisation or liquidity of these derivatives, the US rules require a minimum of five days of margin. The same is true for credit default swaps.
On the other hand, his assertion holds true for futures. The EU rules require two days of margin, while the US rules require only one.
Finally, the situation for foreign-exchange swaps is particularly unclear. Although the US rules exempt FX swaps from any margin or clearing requirements, the EU rules may require both. In fact, EU regulators have said in the past that they will impose margin requirements on FX swaps. Just how much? We don’t know.
Hal Scott, Professor of International Financial Systems, Harvard Law School, Cambridge, MA, US
Director, Committee on Capital Markets Regulation