Esma and MEPs Clash as Emir Poised for New Delays

Terry Flanagan

A row is brewing in Brussels between the European parliament and its chief markets regulator after a key vote rejected some of the proposals drafted by the European Securities and Markets Authority (Esma) that are intended to better monitor over-the-counter derivatives trading.

A vote on Monday night by the parliament’s influential Economic and Monetary Affairs Committee (Econ) by 24-20 to reject two technical standards proposed by Esma on OTC derivatives and central counterparty requirements could significant delay implementation of the European Market Infrastructure Regulation (Emir).

The move, if ratified by all MEPs in a plenary vote in parliament on Thursday, will potentially force Esma to go back to the drawing board over Emir, setting back Europe’s plans to meet a global agreement on OTC derivatives championed by the G20 group of nations aimed at reducing systemic risk in financial markets following the financial crisis.

The main points of contention revolve around the growing powers of Esma, an unelected body. Delays and arguments—many of which have stemmed from industry lobbyists—have been a regular feature so far of Emir’s controversial passage through Brussels and the latest spat, in which some parliamentarians believe Esma has overstepped its authority, may add many more months to a process that the G20 demanded be complete by the beginning of 2013.

The Econ committee wants to see the finalized Emir rules give more flexibility to non-financial companies, who often use derivatives to hedge risks to their business, so that they will not be subject to the more onerous central clearing obligations set to be imposed on financial firms—something that was apparently agreed upon between the parliament and Esma during earlier ‘Level 1’ Emir talks—but it is something with which Esma appears to have now disregarded.

“I don’t want to see delays in the EU living up to its G20 commitments around central clearing and the reporting of derivative trades,” said Kay Swinburne, a U.K. center-right MEP, who is also a member of Econ.

“There is no reason why this has to mean a long delay. This could be addressed efficiently in a timely manner, particularly if redrafting is based upon the kind of informal discussion with the rapporteur [MEP Werner Langen] and shadows that existed with the Commission under the old commitology procedures.

“Respecting the democratic process of scrutiny does not need to delay the legislation by many months; but failing to get this right would set an unwelcome precedent for the co-legislative text to be ignored.

“I hope that the whole parliament will now vote to reject the regulatory technical standards, as currently drafted by Esma and endorsed by the European Commission, which are clearly in contradiction to the Level 1 text.

“Esma does not, and should not, have the power to make political decisions; that is our role and our responsibility. That is why we have drawn a line in the sand.”

“Ignoring these changes to Level 1 text could potentially carve the way to creating a European version of the U.S. Commodity Futures Trading Commission and its style of rulemaking, which is unaccountable and decided by unelected technicians. That is hardly the model we in European markets should be aspiring to.

“Establishing the European Supervisory Authorities [three bodies which were set up in January 2011 to oversee various markets in the EU, one of which was Esma] to ensure a single rule book for financial services across the EU was an important step, but we should ensure that our right to scrutinize the resulting rule book is not diminished.”

It is now down to MEPs to either back or dismiss Econ’s vote. If the MEPs were to uphold the decision by Econ, then it could add many months to the Emir process as Esma would have to redraft the technical standards.

“The vote is another setback for Emir,” said Virginie O’Shea, an analyst at Aite Group, a consultancy, in a Twitter posting.

These potentially new delays add yet more uncertainty to the whole Emir process in Europe with firms left in a sort of limbo as rules have still yet to be fully finalized.

“There is a lot of work required to implement Emir and actual deadline for a specific asset class may only be known 90 days before the actual entry into force, [which is] not enough time to do all the work,” said Adam Bennett, chief executive of Hatstand, a financial IT consultancy.

“However, inaction is also not a possibility because waiting for everything to be a 100% clearly defined will not give enough time for implementation.”

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