Bear traps to snare the implementation of EMIR

November 1, 2010

So where are we with ‘EMIR’, the European Union’s proposed derivatives regulation?  The process is reasonably clear – the regulation is considered by the European Parliament and the Council, in what is referred to as co-decision.  Everything I have been told suggests that the European Commission – which drafted EMIR following its public consultation – remains very involved during co-decision and will be responding to and helping guide the regulation’s passage through Parliament and Council.  Waiting in the wings we have ESMA, which will produce the detailed rules that are clearly absent from the high level statements of EMIR.

Meetings I have had over the last week in Brussels and Paris (home of CESR, which Cinderella-like morphs into ESMA on 1 January 2011) suggest that there are many bear traps set to disrupt and even derail what might have been assumed to be steady progress to implementation.  In no particular order these are on my mind:

1)  Will ‘extreme politics’ in Parliament threaten the regulation?  It has been seriously put to me within the Parliament building in Brussels that derivatives are entirely to blame for the crisis in food prices and their use by corporates lies at the heart of said crisis; so, ban all use of derivatives.  Reductio ad absurdum?

2)  Will amendments proposed by ECON (Parliament’s committee) push the corporate exemption away from its current favourable, albeit ill-defined, wording?  There is a degree of eggshell-treading going on at the moment; many of us fear that excessive focus on the loose ends of EMIR will rebound against the interests of corporates, with a narrowing down of the scope of the exemption ahead of rule-making by ESMA.

3)  Will Parliament (ECON) seek to reduce the scope of rule-making by ESMA by seeking greater prescription in the regulation before it is passed out of co-decision?  This is a variant on the point above and my concern reflects what has been said to me about a tension between the role of ‘Brussels’ (defining the regulation) and ‘Paris’ (CESR/ESMA writing the rules).  I should stress that so far as I know this is not a geo-political observation about the working of the EU but rather a fundamental concern over who writes the rules.

4)  Will the US through the implementation of Dodd-Frank preempt the work of ESMA and force convergence with a set of unfavourable (bad) rules?  The risk is clear: the CFTC in the US is doing the rule-writing for the relevant part of Dodd-Frank and must finish this within 360 days of the passing of the Act in Congress.  So by July 2011 the US work will be done, which means either that ESMA’s subsequent decisions will follow the US – to ensure convergence – or that Europe through ESMA will have to elect for divergence in at least some respects.  The good news – I think – is that CESR/ESMA is already working with the CFTC in an unofficial, informal capacity.  And on top of that there has for some time been an evident determination on the part of the Commission, Parliament and indeed now CESR/ESMA to keep convergence on top of agendas.

5)  Will ESMA recognize that key stakeholders in financial regulation extend beyond the financial sector itself and include end users of financial markets – the ‘non-financial counterparties’ in the derivatives arena?  CESR in its current form has at best a modest track record of inclusiveness; it is vital that ESMA establishes genuine conduits to consult and involve the end users, without whose underlying business risks there would ultimately be no derivative markets.

I write this just before attending a London symposium on EMIR at which Jonathan Faull will be speaking.  Jonathan is the senior civil servant in the Commission with responsibility for EMIR; it will be interesting to see how much comfort he provides  on these bear traps.

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