Disagreements between UK and German ministers at the Council of the European Union's Economic and Financial Affairs Council (ECOFIN) have put paid to hopes that the European market infrastructure regulation (EMIR) might be approved before Q4 2011.
“We need to go further faster. The markets move faster than the wheels of democracy,” warned Michel Barnier, the internal markets commissioner for the European Commission (EC), during the debate on Monday, 20 June.
However France joined Britain in calling for more time to discuss EMIR proposals at ECOFIN, the Council's decision-making body for financial and economic matters.
EMIR, the EC's response to the calls by the Group of 20 to minimise systemic risk in global OTC derivatives markets, is intended to create a new regulatory framework for Europe's post-trade cash and derivatives infrastructure. A major sticking point among politicians is the possible expansion of EMIR to include exchange-traded derivatives, which were exempt from the draft proposed by the EC in September 2010.
The scope of the rules could be expanded in the areas of clearing and reporting obligations as well as access rights, i.e. trading venue access to central counterparties (CCPs) and CCP access to the trade data feeds of trading venues. The current text drafted under the Hungarian presidency makes all derivatives subject to clearing and reporting obligations but access rights are restricted to OTC derivatives.
The regulation must be finalised in agreement with the European Parliament, whose economic and monetary affairs committee (ECON) has approved a text restricting EMIR's scope to OTC derivatives for all of the issues except reporting.
Germany, which houses Europe's largest derivatives exchange, Eurex, and clearing house, Eurex Clearing, both owned by market operator Deutsche Börse, opposes the expansion of scope, while the UK and France are in favour.
Scoping out the opposition
In Monday's meeting, George Osborne, the UK's Chancellor of the Exchequer, pushed for open access to derivatives trading and clearing, in opposition to a block of countries led by Germany.
This would allow venues to trade and process products developed on rival exchanges, leading to competition on price and efficiency rather than product development. Currently, exchange groups typically develop their own products and control their trading and post-trade processing.
Osborne argued that if the scope of the rules was not extended, there was a risk of “uncompetitive practices developing in Europe” resulting from a “fundamental market infrastructure that was not open to all market participants, contradictory to the principles of the single market that we are all committed to”. He also said that a broader scope was needed to match US legislation to avoid regulatory arbitrage.
A spokesperson for the German finance ministry said the scope of the original EC proposal should be followed and that an extension to all derivatives was something Germany “can't entertain”. He also rejected the right of access for all platforms saying that it “assumes interoperability” and therefore the article proposing it should be deleted.
Germany is supported in its opposition to expansion by Bulgaria, Spain, Luxembourg and Latvia and in part by Italy and Poland, which will take presidency of the Council of the European Union for the second half of 2011.
Other issues under discussion include the powers of national regulators balanced against pan-European regulator the European Securities and Markets Authority, a temporary exemption for pension funds from the clearing obligations and the role of central banks in providing liquidity.
Speed of change
As part of the discussions, Barnier said he now expected EMIR to be finalised under the Polish presidency. An October meeting of ECOFIN now represents the earliest opportunity for finalising EMIR during the second half of the year.
Any EMIR text approved by the Council of the European Union must then be reconciled with that of European Parliament, which is expected to vote through the version approved by ECON on 7 July, before legislation is adopted. Once voted on, changes to the Parliamentary draft are time consuming to make, so the greater the disparity between the two drafts, the longer the time needed to reconcile them.
A UK government source asserted that Germany has calculated that it would be more advantageous for Deutsche Börse to retain its dominance in the derivatives business than for Europe to meet the G20 deadline for migrating central clearing for OTC derivatives by end-2012.
Cash market competition
The introduction of post-trade competition in Europe's cash equity markets is also facing difficulties.
At present, broking firms must use a clearer determined by the venue on which they trade. Interoperability arrangements developed by CCPs EuroCCP, EMCF, LCH.Clearnet and SIX x-clear, which would allow firms to choose between a range of clearers, have been approved under the existing drafts of EMIR and by national regulators. The arrangements will force exchange-owned CCPs that are no longer guaranteed order flow from parent venues to offer competitive pricing and services.
However EMCF has now said it will not participate in interoperability agreements as it expects exchanges to favour integrated clearers, often their wholly or partly owned subsidiaries, over other CCPs. It has nevertheless found itself subject to competition as BATS Europe, a multilateral trading facility (MTF) for which it is the incumbent clearer, is launching a preferred CCP model in July.
This will allow firms on each side of a trade to select between the three interoperating CCPs.
“If either of the parties doesn’t select an alternative CCP then the clearing is conducted by EMCF as the default provider,” said Diana Chan, CEO of EuroCCP. “It is not a level playing field, but we are happy because it is the first step towards users being able to exercise their right of choice.”