12 May 2014

Waters Technology: One small step for ESMA

At the Association for Financial Markets in Europe conference, Steven Maijoor spoke about the legislative phase of European market reforms being largely completed. However, the work on the technical standards and the actual supervision stages would roll on for some time.

Europe is getting far closer to achieving Group-of-20 (G20) mandates, albeit a little later than might have originally been envisaged in Pittsburgh. The US, too, is forging ahead with its own narrative. Credit where credit is due, lawmakers on both sides of the Atlantic have put together an incredible volume of new legislation in a relatively short period of time. The G20's demands may have seemed relatively straightforward when first agreed upon, but in actual practice, they required a wholesale overhaul of the way markets worked.

For the European Market Infrastructure Regulation (EMIR), perhaps the most important part of the toolkit in Europe for derivatives, Maijoor said that the technical work was 80-percent complete. In the US, while officially, electronic trading of derivatives is in full swing, there are still numerous exceptions and fierce debate over key areas such as packaged transactions. Reporting is largely in place for both regions, but the clearinghouse issue is causing a headache for ESMA and others.

Only four out of twenty central counterparty clearinghouses (CCPs) that applied have been authorized, although Maijoor said that he expects this number to increase. Still, you can't help but feel there's a little concentration risk in that number. Also, the two remaining areas of Emir technical standards to be defined are pretty crucial ─ which products should go into central clearing, and what level of margin should be posted for those that don't.

On the one part, the likely cost reduction, not needing to buy complicated surveillance platforms and, let's say it again, cost reduction will be key points for resource-constrained operations. On the other hand, not having the primary surveillance operation in-house, with compliance officers familiar with the trade flow of a company and the behavior of its traders, seems like food for thought.

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