ESMA urges EU Commission to act fast on OTC derivatives rules

Delays to implementing margin rules for uncleared derivatives could run the risk of fragmentation and regulatory arbitrage.

The European Securities and Markets Authority (ESMA) has urged EU Commissioner Jonathan Hill to ensure the delay on implementing collateral rules for uncleared derivatives is not prolonged.

ESMA, alongside the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA), detailed in a joint letter the potential consequences if the delay for margin rules on bilateral OTC derivatives is extended.

The EU Commission confirmed last month the initial margin rules will come into effect at the end of the year and not in September as initially agreed with US and Japanese regulators.

“We think it is important that we honour those commitments agreed with our international counterparts, as the delay raises substantial uncertainty regarding the overall implementation,” the organisations said in the letter.

The letter warns uncertainty over the timeline of implementation could cast doubts over the implementation of the variation margin rules in March 2017, which will have far-reaching consequences for buy-side firms.

There is also the concern that a longer delay will result in regulatory arbitrage, as banks trading in Europe will only be partly swept up in the rules.

“The delay in the European Union might incentivise global banks to use their European operations to carry out OTC derivatives transactions and only part of those might be covered by extraterritorial provisions from other jurisdictions,” the letter said.

Earlier this week Scott O’Malia, chief executive of the International Swaps and Derivatives Association (ISDA), said additional delays to the rules will create even more complexity for derivatives users posting collateral.