With regulatory reform on its way to passage in the United States, Europe has now offered various ideas to reform its financial system. However, much of the regulatory reform proposals in Europe at this stage are just that: proposals.
On July 10, the European Commission closed the comment period on its Public Consultation on Derivatives and Market Infrastructure, which outlined the commission’s views on clearing for OTC derivatives, requirements for central counterparties and reporting requirements for trade repositories. According to the report, the commission is aiming for the directive from the G20 summit that all standardized OTC derivatives be cleared through central counterparties by the end of 2012. The formal proposal is scheduled for adoption in September.
On July 1, the Commission completed improvements to the EU framework for funds known as Undertakings for Collective Investment in Transferable Securities (UCITS). The program included a new standardized disclosure document for investors, rules for the conduct of UCITS management companies, new rules for UCITS mergers and master-feeder structures and notification procedures and supervisory cooperation in cross-border activity of fund managers.
Also in July, EU Financial Services Commissioner Michel Barnier said there would be tougher regulation on derivatives and naked short-selling in the EU. This came after Germany’s Federal Financial Supervisory Authority (BaFin) instituted a ban on naked short selling until March 2011, which encouraged German and French leaders to institute a wider EU short selling ban.
On July 7, the European Parliament instituted a cap on bank bonuses, with upfront cash bonuses capped at 30% of the total bonus and at 20% for what the ruling called “particularly large bonuses,” starting in January 2011.
However, despite some changes in the rules, broader reform could take longer due to Europe’s muddled regulatory structure and also because the Markets in Financial Instruments Directive (MiFID) is now under review.
Will Rhode, research analyst at Tabb Group, says confusion in Europe’s regulatory structure is vast. “Europe is going through various regulatory metamorphoses. ESMA [European Securities and Markets Authority] is turning into CESR [the Committee of European Securities Regulators]. MiFid is under review. [The Financial Services Authority] is being dovetailed into the Bank of England." He adds, “[In the U.S.] you’re seeing many provisions being watered down [due to] strong lobbying efforts. Take that times the number of countries in the EU and you’ve got a rough idea of the difficulty.”
Gary deWaal, general counsel at Newedge, agrees. “The biggest issue is Europe vs. London. I’m not sure how much the FSA is in line with the European Commission. There’s an opportunity for regulatory and legal arbitrage,” he says. “The problem is once the European Commission decides to do something, you’ve got to go back to individual [countries] and implement it.”
International coordination is another issue. “[Europe] is looking to do things in stages. They’re looking at clearing as a priority, central execution secondarily, and position limits tertiary. The bill puts everything in one big pot on the U.S. side. If I was [a regulator], I’d want to make sure that implementations of regulations worldwide were happening at the same time,” deWaal says.
Rhode expects tighter regulation in Europe to happen eventually, but he points out a similar scenario to what happened in the United States. “The basic tug-of-war is, you have politicians on one side wanting to push through regulation and not wanting to let momentum slip, but on the other hand you’ve got the industry warning them against the hazards of ill-thought-through regulation.”