How the US outcome should affect the EU’s approach to derivatives’ regulation

June 28, 2010

We have a little under two weeks now until the European Commission’s consultation on derivatives regulation closes and there is a real feeling – at least on my part – that we are in the end game stages.  Whether this is truly the end game time will of course tell.

The EACT will make its response to the consultation widely available as soon as possible.  I am aware that a number of organisations would like to follow our approach and – most importantly – we are very keen that individual companies make their own submissions to the European Commission in support of our position.

The core thrust of our response will be to challenge the realism and the logic of the Commission’s proposed use of two thresholds to determine whether or not derivatives should be subject to central clearing.  In essence we agree with the concept of the ‘information threshold’, which empowers national regulators (under the supervision of ESMA) to have a dialogue with the largest corporate end users.  I am confident that in such a dialogue it will be exceptional and highly unusual if the conclusion is other than that the use is proportionate and consistent with a policy of risk mitigation – which is what I have always argued is the core purpose for which derivatives are contracted by non-financial end users.  Most importantly the dialogue will demonstrate that claims of the creation of systemic risk for the financial system by these end users are unsustainable.

Our view of the clearing threshold remains that the absence of any indication as to how the Commission expects this to be implemented underlines the huge technical uncertainties in defining, monitoring and reporting what might eventually be required by ESMA.  The very concept is a poor attempt by the Commission to corral the systemic risk that it is convinced can be attributed to non-financial end users.

But the most important element in our response to the consultation should now be to highlight the importance of convergence with the regulatory approach in the United States.  We have been waiting for the outcome of the conferencing process in the US, under which the legislative proposals of the House and the Senate have been reconciled.  We now know that the broad principle of an exemption for commercial end users (the US language) has been maintained.  This is of vital significance for its contrast with the attempt by the Commission to construct a structure of thresholds that defies implementation (and common-sense).

We will therefore urge the Commission to limit its application of thresholds to the information threshold, which will allow the outcome in the EU to come close to if not be exactly aligned with what is done in the US.

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