FN: Derivatives' regulatory day of reckoning nears

27 June 2011

European banks and end-users of derivatives are facing a three-pronged regulatory assault on the industry, the full extent of which will become evident over the next year.

This trio takes the form of the European Market Infrastructure Regulation (EMIR), MiFID II and the new Basel III capital adequacy standards. The initial draft form of EMIR, first published last September, has since been discussed at length by the European Council. But agreement between the three arms of EU governance (Council, Parliament and Commission) has to occur before this document can become law – a process known as trialogue. The much-delayed MiFID II is expected to be issued in autumn (though it was promised by the first quarter of this year), while the draft form of Capital Requirements Directive IV, under which framework Basel III falls, should be published this summer.

All these timetables are extremely flexible. Both MiFID II and Basel III are chiefly a response to the crisis and have updated accordingly – and sometimes changed radically – precepts that were contained within the pre-crisis MiFID I and Basel II.

Increasing commoditisation of derivatives means that end-users will have a less expansive, and less tailored, selection of instruments from which to choose. Increased transparency and standardisation are likely to mean a diminution of the infinite variety of derivative instruments.

European maze of authorities

While in the US, enemies of Dodd-Frank have only had to lobby Congress and could count on the support of some Republicans inimical to president Obama and to the whole idea of bigger, more intrusive government, Europeans are confronted by a more convoluted picture. They have to deal with the European Council, the European Parliament and the European Commission. If they win a concession from one set of policymakers, it might well be rejected by the next set with which they have to deal. Information about the industry is also not equally shared among these various layers of government with which European lobbyists must contend. A lawyer familiar with these debates commented last week: “The European Parliament takes a tough stance on these issues, but it is not as well-informed as the council, which is not as well-informed as the regulators, who are not as well-informed as the industry”.

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