European financial regulators recently completed a review of Europe’s financial regulations and updated the Markets in Financial Instruments Directive (MiFID).
While a global effort to shore-up financial regulatory rulebooks is underway, Europe is lagging the United States by about 18 months. That is presenting unique challenges and opportunities according to Futures and Options Association CEO Anthony Belchambers. Three areas where divergence is evident are the treatment of major swap participants, swap execution and the Volker rule.
“In the EU, [major swap participants] will not be pulled into full regulation on the basis of the size of your exposure, but on the nature of your business,” he says. “Are you conducting business with third-parties and swaps derivatives as part of your business? That still will be the test.”
Rather than the use of swap execution facilities (SEFs), the EU is leaning toward a version called organized trading facilities (OTFs). “That means our version of OTF captures a wider range of platforms than U.S. SEFs. That may mean there will be a greater variety of venue diversity over here. We also don’t have the restraints on ownership that the U.S. does on SEFs,” Belchambers says.
Finally, Belchambers says the EU is not pursuing the same push-out rules to proprietary trading as the United States pursued. “They believe that the sort of differentiated capital rules will bring about some degree of separation with some of the mid-sized banks deciding to pull out from proprietary trading.”
Just as in the United States, there has been a push in the EU to central counterparty (CCP) clearing for more products. “There is some concern that because it is good for CCP clearing, it’s automatically good for multilateral execution. In fact the tests are not quite the same. If you look through the history of exchanges and the new contracts they’ve tried to float, a lot of them have failed, even though they were CCP-cleared,” Belchambers says.
One of the issues that many are looking for clarity on is the impact on segregation. While there is a tension between user choice and lessons from Lehman Brothers that collateral needs to be readily identifiable, Belchambers says the EU seems to be pursuing the route of choice so that clearing firms are going to have to offer different forms of segregation and users will be able to choose what they want.
Finally, speculation has become a hot topic in Europe, with some pledging to crack down on the practice in commodities. According to Belchambers, the FOA is “very supportive of the continuance of traders operating in commodity markets for all sorts of reasons.” He went on to say that traders are important to markets and the FOA does not support the use of position limits. “We think there is a deep lack of evidence about whether [position limits] make a difference and secondly a lack of evidence about damage caused by traders in commodity markets.”
A lot of work is left to do around the world as agencies work to shore-up rulebooks. In at least one way, Belchambers says the United States has it easy. “The U.S. has the luxury of having only two political parties whereas the European parliament probably has over 50.” While he is optimistic that the 26 member-states of the EU can work out standards and objectives, he is not so sure about hard rules.