11 March 2013

Reuters: Phase-in of EU derivatives rules may drag on into 2014

Implementing new European Union rules to reduce risks in the $640 trillion derivatives business could stretch into next year because the regulation needs to be phased in gradually.

"It is a phasing-in and this is only logical, because it is such an enormous change to the whole sector", European Securities and Markets Authority (ESMA) Chairman Steven Maijoor said. The European Union, United States and other G20 economies have been trying to devise new regulation to improve transparency and safety in derivatives, which include instruments such as interest rate swaps. These are traded privately between investment banks and other finance firms rather than on exchanges.

The new rules aim to ensure that derivative trades are properly recorded, traded on electronic platforms and backed by a central clearing house with the resources to step in if there were a default. Maijoor said the first phase of implementation in the EU would be to register the central counterparties (or clearing houses) and assess whether they met the new requirements. "Then, in the fall of this year, we will decide which kind of products have to be centrally cleared and which can continue to be bilaterally cleared. This will easily continue into 2014", Maijoor said.

"We are trying to align as much as possible to avoid regulatory competition, regulatory gaps", Maijoor said. But he said the US rules under the Dodd Frank Act were very different from Europe's. And he noted there was little progress made on the cross-border reach of some of the new US rules. "We are trying to convince the Americans to say, once the systems are broadly equivalent to each other, let's rely on each other instead of doubling up", he said. "This is still a difficult issue, there is some good progress, but there is still a gap." Maijoor said the central clearing counterparties would become much larger institutions and there would be new ones trying to get into this market.

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