Europe Way Behind Curve on Implementing New Derivatives Rules

Terry Flanagan

It appears that the European Union may fall way short in meeting its regulatory deadline for derivatives as the brave new world of centralized clearing for much of the vast $700 trillion over-the-counter swaps market fast approaches.

With the G20 group of nations’ strict self-imposed end-of-year deadline now less than a month away for all global jurisdictions to put rules in place to monitor the previously opaque derivatives markets, Europe seems to be bringing up the rear in terms of meeting the G20’s regulatory requirements.

The European parliament gave its seal of approval to Emir, the regulation on which the reforms are based in Europe, back in March and the European Securities and Markets Authority (Esma), the pan-European regulator, then busied itself with writing detailed technical standards before sending them on to the European Commission in late September for approval, which is where they still remain.

But at a recent industry conference in London, one of Esma’s senior regulators let slip that mandatory clearing in Europe may not now be in place until the middle of 2014 at the earliest. The U.S., too, with its similar Dodd-Frank reforms, is struggling to be ready for the January 1 start date but can at least say that clearing obligations will be put in place in stages in the early part of next year.

“The European Commission now has until December 27 to decide whether to endorse the draft regulatory technical standards,” Verena Ross, executive director of Esma, told the ICI Global Trading and Market Structure Conference on December 4.

“They will then move to the European parliament and the Council for their endorsement which, depending on whether the standards have been amended or not by the Commission, may take from one month to three.

“However, regardless of this procedural issue with regard to the timing for implementation, certain provisions of the standards will not have a practical impact on market participants immediately.

“For example, before a class of OTC derivatives becomes subject to mandatory clearing, there needs to be at least one CCP authorized or recognized under Emir to clear this class. Moreover, time is needed to draft, consult on and issue the standards that will specify those mandatory classes. According to our projections, the first clearing obligation should start to apply during the summer of 2014.

“In the same vein, trade repositories need to be operational and authorized under Emir before the reporting obligation becomes effective. The standards include a phase-in approach to give the industry sufficient time to develop their reporting systems.”

Ross also said that Esma was working on ways to try and come up with a solution to the overlapping nature of some of the rules on both sides of the Atlantic and beyond, which is causing much angst from within the industry, as well as collateral requirements for bilateral trades.

These delays to Emir could open up the very real possibility of regulatory arbitrage between the U.S. and Europe, home to the main derivatives markets. While firms are also being left somewhat in the dark as to what they need to do to be prepared for the new rules.

“There have been many changes, but it is a complex process with many moving parts so let’s wait for a final announcement,” Charlotte Crosswell, chief executive of NLX, a new exchange-traded derivatives platform from transatlantic exchange operator Nasdaq OMX that is set to go live early next year, told Markets Media.

“However, the market is having to prepare in advance and is looking for clarity on the solutions that are required of them. Participants have spent an awful lot of time and resources this year and they now need further clarity and solutions to meet their needs. That’s the challenge and opportunity.”

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