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Last updated: September 27, 2012 3:11 pm
Moves to overhaul the global derivatives markets in the wake of the financial crisis took a significant step forward on Thursday after European regulators published their final rules governing trading and clearing.
The European Securities and Markets Authority (Esma), the regional regulator, heeded industry calls to water-down proposals that would have tightened market participants’ reporting requirements for collateral, or insurance for trading, and reduced the amount of capital that clearing houses would have to put in a default fund.
Publication of the technical rules that define the market comes as Europe rushes to meet a mandate from the G20 group of economies three years ago to reform the vast but opaque off-exchange derivatives market against systemic risk. Policy makers aim to push more trades on to electronic trading venues and processed through clearing houses, and set an deadline of end 2012. A clearing house stands between two partyism guaranteeing a trade in the event of a default.
The standards provide “clarity to the market on the shape of the new regime,” said Steven Maijoor, chairman of Esma.
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) and will be presented to the European Commission for ratification by December. However European officials have said markets will not face mandatory compliance from January.
Several Esma proposals have been modified amid industry concerns – from pension funds, lawyers and market infrastructure operators – that workable legislation could be undermined by a too-strict deadline.
Esma softened earlier plans to introduce limitations to portfolio margining, which many argued could have limited trading activity, exposed clearing houses to material risk and curbed some hedging strategies, which many derivatives are used for.
European officials drafting the rules had feared their plans could be affected by proposed Basel III rules on capital ratios, which could dramatically ratchet up the capital and collateral requirements of banks, and reduce the incentive for clearing and undermine the reforms.
The regulator determined a single rule would “unnecessarily restrict clearing houses’ possibilities to innovate and ensure an efficient use of collateral, with negative macroeconomic consequences on collateral availability”, and would allow them to adopt different models to calculate offsets for margin calls.
Lawyers have argued that the European clearing regime is less onerous for end users. “In the US, the clearing obligation falls on everyone who trades an eligible contract, with a narrow exemption when non-financial entities enter into certain hedging transactions. In the EU, the clearing obligation only applies to deals between financial counterparties and non-financial counterparties whose positions exceed a specific limit,” Clifford Chance, the international law firm, wrote last month.
Esma also reduced the amount of their own capital clearing houses had to set aside to be used in a default before the resources of the non-defaulting clearing members could be mutualised. The consultation paper had considered a minimum of 50 per cent but has been cut to 25 per cent.
The European Banking Authority (EBA) has already indicated it will adopt the draft technical standards on the capital requirements for clearing houses.
Esma also determined new arrangements to allow market participants to transfer client assets to another clearer in the event of a default. It had previously proposed a set of requirements on each of the parties involved but acknowledged market complaints that many would be unworkable in practice and potentially counterproductive.
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