EU and US struggle to resolve derivatives clearing dispute

By Douwe Miedema

WASHINGTON, Feb 25 (Reuters) - European Union and U.S. negotiators are struggling to move past some stumbling blocks in talks over mutually acceptable rules for derivatives clearing houses, two people familiar with the talks said.

Negotiators hope to reach a deal by June 15, when new capital requirements kick in for European banks that would make it prohibitively expensive for them to do business with U.S. clearing houses.

Clearing houses stand between buyers and sellers to reduce risk in the $690 trillion derivatives market, which was central to the financial crisis.

EU and U.S. negotiators want to reach an agreement that would allow clearing houses to follow their home regulator's rules, instead of having to comply with two sets of rules.

One sticking point is Europe's refusal to approve U.S. clearing houses. The EU believes U.S. margin rules are too weak, the two people said. Margin rules cover how much cash clients must put up to purchase derivatives.

EU financial services chief Jonathan Hill is in Washington this week to meet Tim Massad, head of the U.S. Commodity Futures Trading Commission, his counterpart in the negotiations, along with other regulators and industry participants.

Some in the market had expected that the two officials, both new to their jobs, could craft a quick end to the conflict. But a deal is still some time away, the two people said.

"We really need a solution ... if we don't address this, you've got a big problem with U.S. clearing houses doing business in Europe while meeting prudential standards that are far less strict," one of the people said.

A CFTC spokesman did not immediately respond to a request for comment. An EU official said there had been progress in the talks, but that staff would "continue to be in touch" to sort out remaining issues.

The dispute is being followed by the four large clearing houses: LCH Clearnet, owned by the London Stock Exchange (Other OTC: LDNXF - news) , Intercontinental Exchange (NYSE: ICE - news) , Deutsche Boerse (LSE: 0H3T.L - news) 's Eurex and futures exchange CME.

European clearing house margin rules require clients trading futures, a type of derivative, to put up enough cash to cover losses for two days, the sources said. In the United States, it is only one day.

Europe is also concerned that these safety buffers in the United States do not account for economic downswings, the people said. This could mean clients would have to put up even more margin if there was a sudden deterioration in the market.

As negotiations drag on, it was unclear whether a deal will be reached by June 15. The deadline to comply with capital requirements has been delayed twice. (Reporting by Douwe Miedema; Editing by Karey Van Hall and David Gregorio)