Experts have warned a September deadline the European Commission has set for the European Securities and Markets Authority (ESMA) to draft technical standards covering the extraterritorial aspects of new clearing regulation will not be met.
Jonathan Faull, director general, internal markets and services at the European Commission, called on ESMA chair Steven Maijoor to deliver the pan-European securities watchdog draft technical standards governing the extraterritorial issues within the European market infrastructure regulation (EMIR) by 25 September.
In the letter, Faull asks ESMA to develop standards, which specifically deal with the application of EMIR to transactions between non-EU entities that have a “direct, substantial and foreseeable” effect on the EU. This relates largely to the role of central counterparties (CCPs) active in European instruments that are registered outside of Europe.
In June 2012, ESMA delayed the development of these standards and has the option to delay these further, but has not yet indicated it will.
David Clark, chairman of the Wholesale Markets Brokers’ Association, said the September deadline would be challenging and that key agreements had to be made at a higher level.
“Until a framework has been developed at an international level for key issues such as CCP resolution and recovery, regional regulators such as ESMA will find it difficult to set meaningful rules,” he told theTRADEnews.com
Under EMIR, CCPs must register with ESMA to operate in Europe by 15 September, a timetable which will further reduce the likelihood ESMA will meet the Commission deadline for draft extraterritorial rules.
The process for registering CCPs for clearing swaps is complex. In addition to registering with ESMA, clearing houses must register with national regulators – such as the UK’s newly-formed Prudential Regulatory Authority – and will be subject to scrutiny by a ‘college of supervisors’, which is expected to further delay this process. Despite this, European authorities expect the clearing of swaps to take place from the end of the year.
EMIR mandates the central clearing of non-exotic swaps instruments – in many ways the European equivalent of Title VII of the US Dodd-Frank Act, which itself has faced extraterritorial issues. If extraterritorial concerns on both sides of the Atlantic persist, it could foreshadow a move by market participants to less burdensome regulatory jurisdictions, warns Clark.
“The proposed timetable for ESMA is very challenging, and the uncertainty caused by EMIR’s extraterritorial rules could well drive liquidity away from European markets,” he said.
Concerns of a liquidity flight from European and US markets was echoed by Diego Valiante, head of research for the European Capital Markets Institute, who said US markets watchdog the Securities and Exchange Commission (SEC) had shown progress by indicating it would recognise foreign regulatory regimes.
“The SEC said it is ready to accept EU regulations as ‘substituted compliance’ but the SEC and CFTC do not entirely agree on this, especially for non-securities-based swaps,” he said.
Valiante said the role of supra-national regulatory bodies such as International Organization of Securities Commissions in setting out rules which would not be mandated for central clearing was also major factor in determining the extraterritorial nature of EMIR.
“The discussion at a global level is how you define standards for non-cleared swaps and if the US and Europe do not have a clear position liquidity may flow to other jurisdictions given the global nature of the swaps market,” he said.