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In a letter to the Agricultural Committee of the US House of Representatives yesterday, Steven Maijoor, chair of the European Securities and Markets Authority, said: “conflicting, duplicative and inconsistent requirements” under new OTC rules could have “serious consequences for global market liquidity and might even have financial stability consequences”.
Maijoor wrote: "The application of two sets of rules to a single entity or transaction will lead to legal uncertainty and will be unnecessarily burdensome for firms. If applied on a cross-border basis to the same entities and transactions, [this] would, in certain cases, impede a transaction from taking place."
A number of different rules affecting the OTC derivatives are scheduled to come into force over the coming months. In the US, the Dodd-Frank Act is set to introduce new rules forcing the trading of swaps onto electronic platforms – known as Swap Execution Facilities – from the first quarter of 2013. Also in the US, rules stipulating that swaps must be cleared are set to be phased in from the last quarter of 2013. Clearing, whereby an independent counterparty guarantees all trades, is designed to reduce systemic risk by mutualising losses among a clearinghouse's members in the event of a firm defaulting.
In Europe, similar rules governing electronic trading and clearing are being enshrined under the European Market Infrastructure Regulation, though these will not be implemented before next year.
Maijoor raised particular concern over a clause in the Dodd-Frank Act requiring EU-based banks operating in the US to register as foreign swap dealers. This registration, required by the end of the year, would apply to entities that are already authorised as dealers under EU rules, which Maijoor said would “be unnecessarily burdensome for firms”.
Maijoor demanded that this registration "should be suspended for foreign entities”, given uncertainty over final OTC rules, and warning it could “undermine” ongoing efforts among international regulators to cooperate.
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