By Huw Jones
(Reuters) - U.S. and European Union regulators clashed on Wednesday over how to provide solid financial backing for the world's $630 trillion derivatives market and also avoid duplication of rules that would be costly for banks and other players.
The two sides are working on regulations to make derivatives less vulnerable to market shocks like the 2008 financial crisis, but differences over the amount of money needed for margins or collateral to back trades threaten to fragment the market, which is largely traded in New York and London.
Regulators want to avoid these rule differences or else customers could play one jurisdiction against another. But the difficulty in getting agreement between the EU and the United States has held up the process.
In derivatives traded on exchanges, margins are deposited at clearing houses which stand between the buyer and seller. Clearing is becoming mandatory and regulators want these third parties to hold enough cash in case they go bust.
Timothy Massad, chairman of the U.S. Commodity Futures Trading Commission (CFTC), told the European Parliament the U.S. system of margining clients provided better protection by building up a bigger pot of cash.
EU rules put more emphasis on margins posted by banks which are members of clearing houses and handle trades on behalf of clients.
Massad said the amount of margin posted by banks was far smaller than the amount end-customers stumped up. "The risk to the clearing house is primarily whether the customer account is adequately margined," he said.
The United States had already agreed to compromise on margins for derivatives that do not pass through a clearing house, he said.
"We will harmonise as much as we can but let's not get pushed by this notion there has to be complete consistency," Massad said.
He will meet the EU's financial services commissioner Jonathan Hill on Thursday in a bid to end the margin deadlock.
Patrick Pearson (LONDON:PSON), one of Hill's senior officials, told the same EU parliamentary committee that the EU's focus was on ensuring financial stability via margins posted by banks.
"We don't follow the suggestion that we should simply accept higher client numbers (margins) in America and lower client numbers in Europe," Pearson said.
"If we don't solve this margin question, one clearing house in Europe is already saying I have to relocate to the United States," Pearson added.
He called on the CFTC to work with Europe to agree global margining rules and in the meantime agree a short-term solution.
Massad disputed the way Pearson described the rules European clearers will face in the United States and urged him to look at the whole picture.
"The notion that we don't care about big banks and the risks they pose I find simply isn't true," Massad said.