The executive director of Europe’s securities watchdog has urged the buy-side to be more active in shaping the future direction of securities and derivatives regulation.
Speaking at the ICI Global Trading and Market Structure Conference in London, Verena Ross, executive director at the European Securities and Markets Authority (ESMA), identified rules around collateral management and automated trading as two areas she considered the buy-side voice was lacking.
“The buy-side has historically only posted collateral but under the new OTC derivatives rules, ESMA is supportive of a two-way system, where collateral moves both ways,” said Ross, who previously worked for the Bank of England and the UK’s Financial Services Authority. "This would help protect the buy-side and we are looking for greater support from them on this issue."
Under the European market infrastructure regulation, the blueprint for Europe’s new OTC derivatives market, swaps will be standardised where possible so they can be traded on exchange-like platforms and centrally cleared. The rules will require buy-side firms to manage variation margin – which reflects the change in the value of an exposure over the lifetime of a trade – in addition to the initial amount they already pay.
ESMA delivered the technical standards – including collateral requirements and the process for choosing which derivatives products will be subject to trading and clearing – that underpin the legislation to the European Commission in September. The rules are now awaiting sign off by the European Parliament and Council of the European Union before they are adopted into law.
Ross added that while many on the buy-side were focused on the January 2013 deadline for EMIR implementation, many of the rules would be phased in over a longer period.
“It is unlikely that the first clearing obligation will come into force before 2014,” said Ross. “Each class of derivative eligible for clearing will first need a central counterparty to be approved and established for it.”
The ESMA director also urged greater buy-side action in establishing the safeguards around automated trading, noting that a buy-side specific consultation on the subject earlier this year drew a limited response.
The watchdog released guidelines at the end of May covering the expectations of brokers, trading venues and national regulators when handling issues related to automated trading, including pre-trade controls, mechanisms to halt trading and appropriate governance for algorithmic trading development.