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Last updated: August 9, 2012 3:27 pm
Two influential trade bodies have criticised proposed rules to reform derivatives trading in Europe, putting more pressure on European regulators as they face a two-month deadline to finalise the rules.
The Federation of European Securities Exchanges, which speaks for stock exchanges, said on Thursday the European Securities and Markets Authority (Esma) was exceeding its mandate as the latter draws up the standards covering clearing.
Its comments come only days after the UK-based Investment Management Association proposed to reallocate the role of broker-dealers in trades – a move that could crimp the intermediaries’ profits.
The comments, part of the industry response to an Esma consultation document, come as the governing body for markets in Europe rushes to meet a tight timetable to deliver the rules.
Esma has to write about 40 technical standards to meet a G20 pledge for far-reaching reform of the vast $600tn over-the-counter derivatives market, intended to guard against future systemic risk after the financial crisis of 2008.
Yet the new rules are scheduled to be finalised in September and presented to the European Commission for ratification by the end of the year. The reforms, in part Europe’s answer to the US Dodd-Frank act, are contained in legislation known as the European Market Infrastructure Regulation (Emir).
Policy makers want more bilateral trades to move on to recognised electronic trading venues, with the deals processed through clearing houses and reported to trade repositories. A clearing house stands between two parties in a deal, guaranteeing the trade in the event of a default.
Pension funds, lawyers and industry trade bodies have become concerned that the regulation could be undermined by a too-strict deadline.
Fese argued that the legislation agreed by the Commission allowed Esma to develop draft regulatory technical standards and a definition of fragmented liquidity. Fese said the technical standards also proposed “remedies to the potential issues posed by liquidity fragmentation. Therefore we believe that ESMA is interpreting its mandate too widely.”
Nasdaq OMX, whose chief executive Hans-Ole Jochumsen is also the president of Fese, has dissented from the Fese stance.
The IMA, whose members manage more than £4tn in investments, urged ESMA to redraft its rules to allow clearinghouses to identify the true owner of positions and assets at all times, so positions could be moved if a clearing member defaults.
“Currently the structure obscures the identity of the client which makes it much more difficult for assets to be returned to the rightful owner,” said Jane Lowe, director of markets at IMA.
Moving more business from the OTC market and through clearing houses meant the current principal-to-principal market model, in which a broker is entitled to a legal share of positions and assets, was not “necessarily the best or should be the only model for the future,” IMA said.
It added that the introduction of individual client segregation would introduce gross margining, the margin that a participant posts in a clearing house for its customers’ positions. It is the sum of the requirements for individual customers into the market.
By designating a broker as an agency, it “would recognise that the principals are the clearing house and the client, and the role of other parties pertained to the carrying out of the transaction but not to legal ownership of the positions, assets and money,” IMA said.
Most UK-based clearing houses follow UK insolvency laws and operate a principal-to-principal model, whereas most US clearing houses operate an agency model. Inclusion of the clause in Emir would over-ride UK law.
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