This week, the European Parliament raised the prospect of taking parts of Europe’s OTC derivatives reform back to the drawing board – just a month before the industry was expecting final sign-off of the new rules.
The latest potential delay to the European market infrastructure regulation (EMIR) relates to the thresholds that determine when corporate firms, major users of derivatives as hedging instruments, need to clear. The European Securities and Markets Authority (ESMA) set the parameters in technical standards that underpin the core legislation.
Originally due by the middle of January, the Council of the European Union and European Parliament took the option to extend the time they need to give their blessing to the rules until 19 February.
An extra month to finalise rules that will result in a profound change to the OTC derivatives market is not entirely unreasonable. But the latest delay is further evidence of a haphazard regulatory process that has been characterised by disorganisation from the very beginning, with the Parliament’s initial draft of the text subject to a number of hold ups.
In drafting the regulations, there appears to have been little recognition of how different types of market participant use OTC derivatives, leading to a constant toing and froing between policymakers.
Exemptions for pension funds – big users of derivatives as hedging tools – were hotly disputed before they were finally granted in the final version, for instance.
Perhaps there should have been a more nuanced approached to EMIR, that first targeted dealers and then the buy-side and other users of derivatives.
Further, ESMA only had three months (one of those being December) to draft the technical standards, which will stipulate the type of collateral that can be used for initial and variation margin, exactly which products will need to be cleared, which CCPs will be authorised under the new regime and margin for those swaps that remain bilateral. All hugely important aspects that will dictate the shape of the market in the years to come.
One market participant pointed out to me that a number of ESMA’s technical standards are at times contradictory and that some of rules do not account for the governance structure of different firms. For example, one clause that requires firms to seek board approval for mark-to-market valuations – impossible for unit trusts that do not have a board of directors.
“To keep to the timetable, it appears you have to have legislation that’s poor quality in some areas,” said the source.
The latest delay wont affect buy-side preparations for the new swaps rules but offer further evidence of a rushed regulatory process through the constant pressure on regulators to comply with arbitrary deadlines they were never going to meet in a million years.