Derivatives regulation – corporate exemption makes progress

May 5, 2010

Michel Barnier made clear at the ECON hearing in Brussels yesterday that he supports the case for corporate exemption from the clearing requirement under the proposed derivatives regulation.  Given Commissioner Barnier’s role – ultimate responsibility for all the work being done by the European Commission to prepare the detailed European Union proposals – his words are very important.  However there is still much to be discussed and many areas of uncertainty in terms of what will eventually pass into law.

What was said yesterday by Commissioner Barnier confirms the content of the internal EC discussion document that was circulating widely three weeks ago.  The devil as they say lies in the detail and this was very much confirmed at a panel discussion in which I participated yesterday, also in Brussels.  With me on the panel was Emil Paulis, who heads up the division within the EC drafting the proposals for derivatives’ regulation.  Mr Paulis focused on the application of thresholds; from the discussion it was clear that there is work to be done still on how to define what might amount to two thresholds.

My view remains that absolutely central to the outcome of the regulatory discussions is the question of systemic risk.  It is clear that this greatly preoccupies the EC staff; my own view is that this continues to be the imaginary demon.  My arguments have been used several times now and revolve around the absence of any empirical evidence for the existence of such risk, the knowledge that corporate failures are far more prolonged (and therefore less ‘risky’) than financial sector failures and the absence of any material inter-connectedness for corporates.

Of course the other fascinating open issue is just where does all the EU work leave the prospects for alignment with the US.  Mr Paulis made evident yesterday that whilst the EU is fully signed-up to the objective – and need – for alignment, this commitment will not distract the EU from core principles and objectives.

And the elephant in the room remains the Basel III impact – will new bank capital regulations still be punitive and effectively reverse the benefits of corporate exemption?

Interesting times.

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