The ability of the UK to influence capital markets regulation could be undermined after prime minister David Cameron vetoed a new European treaty designed to save the euro, but market observers believe any impact will only be felt in the longer term.
With the passage of many new pieces of key European legislation becoming increasingly politicised, the UK faces the prospect of becoming a marginal voice.
As well as an ongoing debate on an EU-wide financial transaction tax – of which the UK government has been a vocal opponent – 2012 will see the finalisation of rules in the European markets infrastructure regulation (EMIR) to reduce systemic risk in the OTC derivatives market and continuing negotiations in both the European Parliament and Council of the European Union on MiFID II.
“Cameron’s veto was meant to be a show of strength. Now, without a place at the negotiating table, we may not get to influence those very policies that will impact on the City and our financial sector as a whole,” Sharon Bowles a UK Liberal Democrat MEP – who chairs the economics and financial affairs committee of the European Parliament – told the press following the veto. Liberal Democrats are the junior governing partner in a coalition led by Cameron’s Conservative party.
The proposed European treaty, led by Germany and France, sought to impose tighter control on the finances of member states within the euro-zone with the aim of restoring market confidence. Cameron rejected the plan after his request for assurances relating to the UK’s future competitiveness as a financial centre were rejected. In the absence of a new treaty, willing states could sign up to an intergovernmental agreement outside of the EU legal framework.
Piotr Maciej Kaczynski, research fellow with the Centre for European Policy Studies, a Brussels think tank, says the veto could strongly limit the UK’s capacity to participate in decision-making in Europe.
“Cameron is not looking at the big picture and the UK needs to distance itself from this position,” said Kaczynski. “The episode will not just impact the banking industry in London but also Britain’s ability to influence any other European policies, such as agriculture, immigration and the single market – which the prime minister maintains is a priority.”
Kaczynski suggests UK Conservative MEPs could pay dearly for Cameron’s decision. At the top of the hit list could be Malcolm Harbour, chairman of the internal market and consumer protection committee and presently the only Tory to hold the top job on a European committee. “This is an influential committee and Harbour could be dropped as punishment to the Tories,” Kaczynski said.
Kaczynski explained that European committees have a review process in January but there is a widely accepted convention that if a committee is still in process, chairs are not removed. However, members opposed to Britain’s stance may well take the unusual step of removing Harbour to “teach the Tories a lesson”.
But in practical terms, the machinery for debating and framing the rules that govern Europe’s financial markets is unaffected by the veto. Recently announced proposals for a Europe-wide financial transaction tax will now follow the same path as EMIR and MiFID II.
According to Rebecca Healey, analyst at TABB Group, the UK’s opposition to the financial transaction tax, which is slated to boost the EU’s coffers by €57 billion annually, is valid.
“The overall benefit of the tax could be short-lived and the harm to the European financial industry could be irreparable,” says Healey. “An added tax in Europe could lead to a migration of business to the US or Asia, which would have a negative impact on the region as a whole.”
London’s dominance as a financial centre, accounting for 45.8% of the global interest rate derivatives market for example, would mean the UK is disproportionately affected by a financial transaction tax, Healey adds.
While the UK was heavily criticised by the French and German architects of the new European treaty, the climate seems to have cooled since the 9 December veto.
“The veto has caused a reaction, but equally it is clear that not everyone in Europe wants to exclude the UK going forward. This makes the future impact of the veto hard to call,” says Jane Lowe, director of markets at UK-based buy-side trade body the Investment Management Association.
Nonetheless, there is the potential for regulatory negotiations to become politicised in a number of areas.
A focal point of MiFID II could be MiFIR, the regulation that accompanies the new MiFID directive, which gives member states no room for manoeuvre once agreed at the European level.
MiFIR will extend the debate on access to post-trade infrastructure that dominated discussions on OTC-focused EMIR, as it proposes obliging central counterparties to accept trade feeds from all venues for listed derivatives and equities.
National interest has played a large part in discussions on EMIR both in parliament and between member state governments at the Council of the European Union. Before
agreement could be reached in the council, UK chancellor George Osborne reportedly relented on plans to extend EMIR to listed derivatives in favour of a provision that would ensure post-trade competition in the OTC derivatives market. The text of EMIR is scheduled to be finalised early next year.
Post-trade infrastructure has also become a thorny issue between the UK and European authorities following the decision by the UK government to sue the European Central Bank over its proposal to prevent some euro-denominated securities being cleared outside the euro-zone.
If enacted, the proposal would seriously damage the profitability of UK clearing houses, such as LCH.Clearnet. The UK currently processes 40% of European OTC derivatives transactions.
Europe’s sharper teeth
In tandem with the flow of legislation, a further shift in the supervision of European markets is the emergence of a tougher watchdog, in the form of the European Securities and Markets Authority (ESMA), which replaced the Committee of European Securities Regulators in January 2011 as part of a more coordinated regulatory system in response to the financial crisis. ESMA’s role in the supervision of central counterparties has been a key reason for delays in finalising the EMIR text.
However, Steve Wood, founder of Global Buy-Side Trading Consultants, former global head of trading at Schroder Investment Management and a member of ESMA’s secondary markets standing committee, believes the impact on ESMA’s work will be limited.
“The UK veto should have no influence on what EMIR and MiFID are attempting to achieve or the work that ESMA has to assume as part of its responsibilities under the new rules,” said Wood. “ESMA working groups are made up of market practitioners plus regulators from all 27 states, so politics should not affect the implementation or technical standards related to upcoming legislation.”
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