The extra time given to European buy-side firms having to comply with central clearing rules could have stemmed from regulators learning lessons from issues with the rollout in the US, according to an industry expert.
European regulators published a timeline earlier this month in which they granted non-clearing firms 18 months relief from the implementation of the rules later this year.
The requirements will come four years later than the G20 countries had initially planned and three years after the US introduced a similar phase-in approach.
John Nicholas, global head of new regulation monitoring and implementation at Newedge, believes Europe’s regulators have learned from some of the issues the Commodity Futures Trading Commission (CFTC) had introducing its own equivalent requirements.
“There clearly was a conscious effort to track to a certain extent what was done under Dodd-Frank,” he said.
“I believe this was done to give market participants ample time to set up OTC clearing as not everybody who trades OTC swaps currently has a clearing member.”
Once the European Securities and Markets Association (ESMA) finalises its rules, clearing firms will have six months and non-financial firms will have three years to comply.
The buy-side will have until 2016 to begin centrally clearing OTC derivatives after ESMA described them as ‘the most heterogeneous’ in terms of types of counterparties.
The regulator said the date would provide ‘sufficient flexibility for all counterparties including those who are less active in the market and whose legal and operational capacities are less sophisticated’.
The rules will cover interest rate and credit default swaps, however which specific instruments will be subjected to the changes are still being decided.
In order to prepare for the deadline, buy-side firms trading the products will need to begin searching for a clearing broker.
Nicholas added that this can be a long process, which could have been part of the reason ESMA gave firms so much time to meet the requirements.
“Unlike in the US, where most of the big buy-side firms already have clearing relationships, it is different in Europe where even some of the bigger entities don’t currently have clearing relationships.
“It takes time to select a clearing firm, put documentation in place, get approvals from a risk and credit point of view on both sides – the clearing firm and the customer. That is probably why they did provide the longer implementation period.”
In contrast to the European timeline, each US category was only three months apart, with the rules coming into effect for swap dealers on 11 March, for buy-side firms in June and all others in September 2013.
When issues arose around the process the CFTC handed out no-action letters granting relief to a number of counterparties.
In Europe, regulators do not have the same power, meaning when the rules come into force there will be no exceptions.
ESMA has also given itself the ability to extend consultation periods, therefore giving itself more flexibility and chance of successfully implementing the sweeping new rules into the market.
The extra time allows for adequate preparation for all firms involved, something ESMA recognised from observing their counterparts across the Atlantic.