Showdown Expected as U.S. and European Policymakers to Thrash Out Derivatives Framework

Terry Flanagan

New derivatives regulation in Europe passed another major hurdle yesterday after a political fudge in Brussels secured safe passage of the new rules, although a potentially bigger hurdle remains as the process moves on to the next crucial stage—how to harmonize the regulations on either side of the Atlantic.

The European parliament decided yesterday to withdraw a motion proposed by the parliament’s influential Economic and Monetary Affairs Committee (Econ) which earlier in the week voted to reject some of the technical standards written by the European Securities and Markets Authority (Esma), the pan-European regulator.

If MEPs had supported the motion then the European Market Infrastructure Regulation (Emir) technical standards would have been sent back to Esma to be re-written, adding many months to the process. It is thought that the European Commission lent on parliament to secure the passage of the much-delayed document.

The G20 group of nations wanted to see the new regulations—which are intended to add more transparency to over-the-counter derivatives trading by pushing all standardized derivatives contracts through centralized clearing and on to exchange-like venues—in place by the end of 2012. In Europe, although the technical standards are now likely to enter into force by mid-March, the clearing obligations, for example, are not expected until March 2014.

The U.S., the other main global derivatives hub, with its similar Dodd-Frank Act, is slightly ahead of Europe in the process although many market participants are fearful of the sheer complexity and overlapping nature of the reforms.

Up until now, jurisdictions have mainly been getting their own house in order over the new derivatives rules, but a fraught process is now likely to ensue as inconsistencies will need to be ironed out for the rules to work effectively in practice. Many market participants have grave doubts that a coherent regulatory framework will be established.

“Next week I will be traveling to the U.S. and will meet amongst others with Gary Gensler, chairman of the Commodity Futures Trading Commission,” said Michel Barnier, the European Union’s financial services commissioner.

“I will be able to reassure our American counterparts that the European Union is meeting its G20 commitment on derivatives, and that we are now in a position to apply stringent rules in Europe that are equivalent to the ones in the U.S.

“With my visit I hope to make progress towards a system whereby the European Union and the U.S. recognize the application of their respective rules on both sides of the Atlantic as equivalent.”

Some MEPs, though, are still claiming success despite the last-minute withdrawal of the motion to allow 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.

“The Commission has acknowledged that the parliament’s concerns are valid,” said Kay Swinburne, a U.K. center-right MEP, who is also a member of Econ.

“When providing guidance on how Emir will be implemented for non-financial end-users of derivatives products there will be a long phase-in, and flexibility for supervisors in how the rules are applied.

“My major concern that corporate users of derivatives would not be able to participate without expensive systems has been recognized by the Commission which will give legal certainty on this issue in the coming days, and make clear that manual confirmation process will be acceptable.”

Other MEPs voiced their frustration at the process and hinted at the strong-arm tactics employed by the Commission to push Emir through.

“While the procedure for adopting the rules was certainly not optimum, rejecting these essential rules would have been throwing the baby out with the bathwater,” said Sven Giegold, a German Green MEP who is also a member of Econ.

“This strengthening of the existing rules is clearly necessary and in the public interest. While the procedure for adopting the new rules was lacking from a democratic and transparency point of view, the objection by MEPs was based on shaky legal foundations.”

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