Europe’s Clearers Issue Emir Warning

Terry Flanagan

Europe’s clearing houses have warned the region’s regulator that they face becoming less competitive if new global rules to overhaul the over-the-counter derivatives market are adopted differently in the trading bloc.

The European Association of Central Counterparty Clearing Houses (Each), a trade body that represents 23 of the region’s clearers, says the current proposals from the European markets regulator could do more harm than good.

“If European requirements are significantly more onerous than the accepted global standards, it may undermine the competitiveness of European central counterparties, putting them at a regulatory disadvantage—particularly in light of the global nature of the OTC derivative business—and encouraging regulatory arbitrage,” said Each in a letter to the European Securities and Markets Authority this week.

Each has warned that the proposals will significantly increase clearing costs, especially for margin levels and eligible collateral, to levels beyond that stipulated. It also said that some of the technical standards are too authoritarian.

The G20 group of nations has imposed a deadline by the end of this year to introduce far-reaching reforms to the $700 trillion global OTC derivatives market. Policymakers want all OTC derivatives to be traded on electronic platforms and, where possible, be cleared by central counterparties by this date.

The rules are being put in place to regulate and reduce the risks from an opaque sector that accounts for roughly 95% of all derivatives trades.

Esma is responsible for implementing the European response to the mandate under the European Markets Infrastructure Regulation (Emir). It is the equivalent to parts of the Dodd-Frank Act in the U.S. although Emir goes further than Dodd-Frank in that it lays down a regulatory framework for overseeing EU clearing houses.

“The mandate of the G20 was to promote the attractiveness of central counterparty clearing and thereby increase its use in relation to standardized OTC derivatives business,” said Each. “In Each’s view, the approach suggested in the [Esma] discussion paper does not adequately support that mandate and in some respects it may actually undermine it.”

Paris-based Esma invited comments on its discussion paper and is operating under a tight deadline to prepare technical standards that will determine future market structure. The next steps for the pan-European regulator will be to prepare a consultation paper, followed by a final public consultation, on Emir by the summer before submitting the final version to the European Commission for endorsement to meet the G20 deadline.

“We recognize that this discussion paper represents the first stage in seeking views from stakeholders and that Esma will further conduct a further public consultation before the draft technical standards are submitted to the Commission,” said the London Stock Exchange in its filing. “Nevertheless, we are concerned, at this initial stage, about the lack of time to respond to the wide range of questions raised, and the volume of supporting data requested.”

Marathon negotiations and delays have plagued Emir and some critics believe it may prove impossible to pass Emir into law before the end of 2012. Uncertainty is also developing in the market as many firms are not likely to now know until late summer at the earliest the exact nature of the reforms.

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