Europe Pushes Ahead With Post-Trade Reforms

Terry Flanagan

Europe is pushing forward with legislation on post-trade infrastructure, including clearing, settlement and trade repositories.

European Markets Infrastructure Regulation (EMIR), which covers over-the-counter derivatives (OTCs), central clearing parties (CCPs) and trade repositories, aims to bring greater safety, transparency and stability to the OTC derivatives market, which was valued at around €425 trillion in 2009.

A key controversy remains as to whether to extend the EMIR obligations from OTC derivatives to listed exchange-traded derivatives.

“I don’t think that listed derivatives should be included in EMIR,” Jacqui Hatfield, partner in the financial services regulation practice at Reed Smith in London, told Markets Media. “I think it goes beyond the G20. This is an attempt to create a level playing field where one is not necessary.”

A proposal to extend EMIR to listed derivatives was proposed in April but was not included in the draft legislation that was approved by Parliament’s economic and monetary affairs committee in May. Germany has opposed the move to extend regulations to listed derivatives on the grounds that it goes beyond the G20 agreement.

“The proposal, initially put forward by the Commission, is strongly supported by the U.S. and those who wish to see the EMIR provisions on interoperability between CCPs [and] break up anti-competitive ‘vertical silos’ where trading, clearing and settlement all take place under one roof,” said Brian McDonnell, head of the financial services regulatory group at Olswang LLP.

Opening listed derivatives to the regulatory regime would bring Deutsche Bourse under the open access provisions of EMIR and would dilute or eliminate the competitive advantage currently enjoyed through linking clearing and trading together.

“I think there is a danger of fragmentation,” Hatfield said. “U.S. transactions will end up being cleared by U.S. CCPs and EU transactions by EU CCPs. This will be partly political and partly due to fears of overlap.”

The European Commission’s consultation on harmonization of securities settlement recommends establishing common EU rules on settlement discipline, including early matching of settlement instructions.

Settlement instruction matching forms an integral part of Target2Securities (T2S), a uniform, pan-European settlement system led by the European Central Bank. The ECB has set up a high-level Harmonization Steering Group (HSG) to define the top priorities and functional targets for harmonization activities going forward, and how best to deliver concrete results before the launch of T2S.

“With over 340 million securities transactions with a value of some 850 million euros settled by EU securities settlement systems in 2009, nobody can deny the need for safe and efficient infrastructure in Europe without access barriers,” said Patrick Pearson, head of financial markets infrastructure in the European Commission’s Internal Market Directorate General.

Since the original EMIR was proposed by the European Commission last September, both the European Parliament and the Council of the European Union have been trying to resolve differences on areas such as interoperability, third-country CCPs, and whether the legislation should extend to listed as well as OTC derivatives.

EMIR is likely to come into force in late 2012 and, as a regulation, will apply directly in member states without the need for transposition into local law.

The United Kingdom has sought to extend EMIR to cover listed derivatives in addition to OTC, creating an impasse in the Council with some Member States, including the U.K. and France, holding out for EMIR to apply to all derivatives and others, including Germany, taking the position that it should apply only to OTC derivatives.

In May, Mark Hoban, financial secretary to HM Treasury, stated that the new EMIR standards should not be allowed to embed monopolies in clearing and that “vertical silos” must be subject to fair and open access requirements. “Predictably, the European Parliament is fiercely opposed to such a development,” said McDonnell.

Operators of central securities depositories (CSDs) will be subject to a new regulatory framework under legislation that’s contemplated by the European Union.

The CSD regulations are a long time coming. The Giovannini Group, in a 2001 report, had identified several barriers to efficient clearing and settlement systems, including national differences in settlement periods.

In the United States, National Securities Clearing Corp. (NSCC), a subsidiary of DTCC, functions as the central counterparty for the nation’s major exchanges and markets, clearing virtually all broker-to-broker equity, listed corporate and municipal bond trading in the U.S.


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