First-Mover Benefits For Staying Ahead In Regulation

Terry Flanagan

Despite European markets being left slightly in the dark by the seemingly constant tinkering to upcoming financial regulations by politicians and regulators, it may have been wise all along to have been trying to second guess the moves.

“Certain things have crystallized,” Tim Dodd, head of product management of SunGard’s Front Arena trading platform in London, a trading and technology company, told Markets Media at WBR’s recent Trade Tech Europe 2012 industry event in London. “Some firms have made a good guess at where the regulations are going to end up and have taken a pragmatic approach to the situation.

“This has generated strong new flows of business for firms offering customers first-mover advantage even though the regulatory situation hasn’t yet fully distilled. Indeed, we see pragmatic leadership appearing for one or two firms where investments have already paid off.

“But, of course, there are many who haven’t risked finalizing their investments. Why? Because the European regulatory landscape will be a bit harder to finalize than in the US. It is difficult to get a level playing field as there are more regimes in Europe. It will be some time before all firms have adapted.”

The recent iteration of Emir, or the European Markets Infrastructure Regulation, that is currently snaking its way through the European Union has recently seen 100 pages of changes added to it. Emir, which will require all over-the-counter traded derivatives to be processed through clearing houses to add greater transparency to the process, was last month given the seal of approval by the European parliament, and is expected to become law by the end of the year.

While the revised Markets in Financial Instruments Directive (MiFID II), which is also being brought in to make financial markets more efficient, resilient and transparent in response to the global financial crisis of 2008, is also making its way through the EU’s legislative chambers despite much opposition from industry lobbyists. A May 10 deadline is approaching for amendments to be tabled by the European parliament’s ECON committee. Parliament, though, has already warned in a report that the European Commission’s draft measures do not currently go far enough. After this, in July, MiFID II is likely to be bashed into shape as the parliament and Council of Ministers will negotiate the finer points of the proposals.

Dodd, though, believes the July deadline for the next stage in the MiFID II process will slip as will the end of year deadline for Emir as lobbyists, lawyers and powers-that-be continue to fight their corners on the interpretation of the new laws. This means that Europe will likely miss the G20’s self-imposed deadline of the end of the year for pushing the $700 trillion global OTC derivatives market on to regulated exchanges.

A compliance officer at one London-based asset manager, who declined to be named, said: “We have embarked on a significant investment to extend our existing derivatives infrastructure and to create a single platform for bilateral and cleared OTC activity. Our implementation timelines are well ahead of any regulatory timeline.”

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