10.04.2011
By Terry Flanagan

Showdown Over Clearing

Market groups say that European regulations should provide open access for both OTC and listed products.

A pitched battle is being waged in Europe over the scope of legislation on post-trade infrastructure, in particular over the issue of nondiscriminatory or open access to clearing venues.

At issue is whether to extend the EMIR obligations from OTC derivatives to listed exchange-traded derivatives.

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.

Proponents of opening EMIR to listed derivatives say that EMIR should not be allowed to embed monopolies in clearing and that vertical silos must be subject to fair and open access requirements.

“We consider that choice and efficiency in clearing services in the EU may diminish dramatically if the current trend towards concentration in the provision of clearing and trading services continues, and if remains essentially unchecked by regulation that ensures access to such infrastrcutur4es by other infrastructures,” according to a letter sent by a cross-section of buy- and sells-side trade associations, such as the Association of Corporate Treasurers, International Swaps and Derivatives Association, and the Association for Financial Markets in Europe, to Michel Barnier, commissioner for internal market and services at the European Commission.

“We urge the Commission to introduce explicit and detailed open access requirements—governing clearing of all financial instruments—in EMIR now, and in MiFID in due course,” the letter said.

Such open access requirements should ensure that a clearing house must accept instruments for clearing regardless of the venue on which they are traded, and that a venue must provide data feeds to any clearing house that wants to clear the instrument in question.

EMIR is scheduled to be taken up by the Council of the European Union on Tuesday, where it is expected to be adopted in its current form, i.e., limited to OTC derivatives.

“EMIR, which is the European version of the post-trade elements of the Dodd-Frank Act, is virtually guaranteed when it goes to Council on Oct. 4,” Daniel Marcus, managing director of strategy and business development at Tradition, the interdealer brokerage subsidiary of Compagnie Financiere Tradition, said at the SEFCON II conference in New York on Monday. “It will only cover OTC derivatives.”

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 vertical silos where trading, clearing and settlement all take place under one roof.

The European Commission’s proposals on Markets in Financial Instruments Directive (MiFID II) extend the original MiFID’s scope far beyond equities to require that OTC derivatives be traded on central exchanges.

The proposals will be formally unveiled on Oct. 21, with adoption of new rules expected in 2013.

As regulations, both EMIR and MiFID II will apply directly in member states without the need for transposition into local law.

“Unlike a directive, an EU regulation is directly implementable, so the debate is taking place at a much higher level,” said Marcus.

MiFID II will require that CCPs provide non-discriminatory access to clearing of financial instruments regardless of the trading venue on which a transaction is executed. Concomitantly, it will require trading venues to provide trade feeds on a non-discriminatory basis upon request to any CCP that wishes to clear financial transactions executed on that venue.

Full interoperability among the major CCPs means that customers will be able to choose which CCP clears their trades, and consolidate clearing with their respective CCP of choice if they wish to do so.

CCPs favor interoperability, provided that trading venues furnish the interoperating CCPs with their trade feeds.

Since the original EMIR was proposed by the European Commission in Sept. 2010, 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.

The European Parliament had put off a vote on EMIR in July in order to give legislators more time to reconcile differences among some EU member states.

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.

Germany has opposed the move to extend regulations to listed derivatives on the grounds that it goes beyond the G20 agreement.

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.

“Unlike a directive, regulation is directly implementable, so the debate is at a much higher level,” said Marcus.

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