Support from companies across Europe for sensible exemptions

October 7, 2010

In January of this year the EACT wrote an open letter to the EU Commissioners, in which we argued strongly that the EU approach to derivatives’ regulation risked serious adverse (and presumably unintended) consequences.  More than 160 companies added their names to our letter.  Since then there’s been intensive discussion in Brussels and our involvement has been considerable.  We have now a much more sensible approach to regulation, although this remains to pass through the ‘co-decision’ process in Brussels and there are many traps ahead of us.

It is very likely that in the next few months we will want to use a similar letter again to the EU authorities, to provide added support for the approach proposed by the Commission and to argue that the benefits of the exemption route (the thresholds) should not be watered down in co-decision.  What follows is the text of an update email sent today to the companies that signed our first letter – it has also gone to a number of other companies that subsequently confirmed their support for our action:

“This e-mail is addressed to the companies who were signatories to the letter sent by the European Association of Corporate Treasurers (EACT) to the EU Commissioners in January of this year, plus a number of other companies that indicated they would support subsequent letters.  Our letter urged the Commission to take into account the unintended consequences of the initial proposals for the regulation of derivatives, which could have had a dramatic effect on the liquidity of non-financial companies and lead to a reduction in their risk mitigation activities.

The EACT has been working actively throughout 2010 to seek to influence the final outcome of the European Commission’s proposals.  Over the last few months we have received financial support for this from ten large European companies.  With this support we have been able to work with a professional advisory firm, which has made substantial input into our lobbying efforts.  We have of course submitted responses to the two rounds of public consultation; these can be accessed here.

In September the Commission published its regulatory proposal.  This includes a substantial exemption for non-financial counterparties, along the lines for which we have been arguing since the debate began in 2009.  There is however a significant amount of further work to be done, primarily to ensure that the outcome we now have from the Commission is maintained over the coming months during the extended discussions that will take place in Brussels.

During this period the proposals will go through the EU’s co-decision process involving the European Parliament and Council.  We understand that it will be particularly important to maintain contact with MEPs and a range of other Brussels officials.

There are two specific areas of concern in the next stage.  The first reflects the number of uncertainties arising from the Commission’s proposal, particularly in the area of the treatment of a company’s hedging contracts in the situation where an organisation moves into or out of the scope of mandatory central clearing.

The second area of concern reflects the key role that the new European Securities Markets Authority (ESMA) will play in the detailed implementation of the new regulation.  The Commission’s proposals delegate a substantial area of responsibility for this to ESMA and we have already expressed our hope that the organisation will take into account the concerns of non-financial counterparties as well as those of the financial institutions.

It is important also to note that above and beyond what is happening in the EU there is the continuing threat that the new Basel III capital regime will be used punitively with respect to banks’ non centrally-cleared derivative transactions.  The EACT has argued and will continue to do so that it is inconsistent regulatorily to allow an exemption but then make it unattractive for companies to benefit from this because of the pricing applied by banks.  This argument is made in the context of the absence of any evidence that the non-financial sector is a source of systemic risk.

The EACT intends to continue to work with the group of European corporates that have supported our efforts so far by providing funding.  So that we can again involve a professional advisor we will seek to raise additional funding and that is now underway.

At some stage it is likely to be sensible to organise a further letter to the relevant authorities in the European Union, along the lines of our original letter in January.  In that event I hope that the EACT and the national treasury associations will be able to ask you to confirm that your company’s name can be added to the letter.  I cannot overstate how important it is to show widespread support across both large and small companies in Europe.”

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