My letter to the Financial Times on 22 May produced a modest firestorm of response in letters to the paper.  I guess I should have been prepared for that: when I gave evidence to ECON in the European Parliament back in February 2012 I was assailed from all corners with hostility, with the three other speakers being vehemently in support of the original proposal (for an FTT in all 27 Member States).  The MEPs in the chamber seemed in denial by political dogma, prejudice or whatever; and nobody was willing to support any of the concerns that I was highlighting over the real economy impact.

How greatly things have changed since then.  There’s much wider acceptance that there are profound problems with the nature and the implementation of FTT.  I feel much less isolated in expressing the views that we hold in the EACT.  But the reactions now to my FT letter seem to reflect a reanimation of some of my old demons.

I had said: “…[FTT’s] avowed aims – to seek some recovery from the financial system for the taxpayer costs of the crisis and to discourage non value-added transactions – are ones with which the real economy has some sympathy…”.  I’m not sure I could have pinned my personal feelings more overtly to the mast.

Lord Myners – for whom I have huge respect – wrote in response on 28 May that “…Richard Raeburn misses the point. There is no evidence that high levels of equity trading bring any benefit to investors or corporations; indeed a great deal of evidence, including the performance over longer time periods of passively managed funds versus most actively managed diversified portfolios, suggests the reverse”.

In fact I entirely agree with Lord Myners and my personal money is where my mouth is – I pursue a passive investment strategy.  But in the letter I was neither directly nor indirectly linking FTT to this important issue.  For the real economy there is plenty of credible evidence to show how the tax will substantially raise the cost of derivatives and of financing.  The underlying activities giving rise to the need for derivatives and financing are nothing like as controversial as is active trading by investment managers – indeed they are central to what companies need to do to reduce financial risk and assure the supply of liquidity for fixed and working capital investment.

I believe that the way to cut the active trading by investment managers that generates little or no real value for those carrying the cost is to work harder to demonstrate the case for passive strategies.  I don’t think that the passive trading argument is sufficient in itself to justify the implementation of FTT.

On 3 June 13 Sharan Burrow of the International Trade Union Confederation wrote to say that “…Politicians, we are told by Richard Raeburn, have backed “a monster that threatens their children. In Europe, the monster is not the FTT. It is the oversized and subsidised European banking sector, which populates more than half of the official Group of 20 “too big to fail” list”.

Of course I wasn’t commenting on the banking sector and, probably much to Ms Burrow’s surprise, I actually agree with much of her core sentiment.  But FTT is neither sufficient nor necessary to get everyone to address the fundamental and still unresolved issue of the monstrous problem of banking.  I’m with Ms Burrow in believing that this is of huge concern and that the EU and governments generally have still not adequately addressed how to protect the taxpayer, with its generational burden from the crisis and that threatened by further crises.

In my view the real argument against FTT still remains intact: this is a tax that will largely not be paid by the financial sector but will be borne by all of us – companies, individuals, pension funds – who must deal with that sector as it is now.  I’m aligned with Lord Myners and Ms Burrow in wanting an economy in which non value-added activities in the financial sector are discouraged and where the taxpayer will not stand yet again as bailer-out of last resort for poor management within excessively large banks.

A refined and much better focused FTT that addresses these legitimate aims would be far easier to support and must be the safety route for the politicians who (foolishly, I would argue) jumped on the bandwagon of the Robin Hood Tax.  In this new FTT it should be a given that the burden of the tax remains, so far as this can ever be possible to guarantee, within the financial sector.


If anyone ever cares in the future to write the history of the extension of financial regulation to the real economy – so clearly best selling material – it will I hope be remembered how much of a volte-face the EU policy makers performed. At the outset, in the summer of 2009, the official position was adamantly that there would be no special treatment for non-financial users of derivatives. We fought and won, always remembering that our victory in battle could be overcome by the loss of the war.

That war was of course Basel III and its European incarnation, CRD IV / CRR. Funnily enough we won the war as well, especially once we secured support in the European Parliament for the extension of the EMIR exception principle to the CVA risk capital charge in CRR.

So there we are; or at least we think we are there. There are troubling signs of a major pushback in the United States against the CVA risk capital charge exemption. The stage it would be unfair to focus on individual banks; that may come later. What we do know is that the investment banks’ US trade association, SIFMA, has written to the Secretary of the US Treasury. The letter is diplomatically worded but its intent is fairly clear. SIFMA states:

“While we share the concern that the CVA is incorrectly calibrated and in need of major revision, this action is a significant deviation from Basel III and the G-20 principles of uniform application. Not only is this exemption inconsistent with implementation of the Basel III standard, it has the knock-on effect of placing non-EU banks on an unlevel playing field with EU supervised banks…..

We would respectfully request that you raise with the EU that this difference in regulatory treatment runs counter to the Financial Stability Board’s and G20’s stated objectives of promoting internationally coordinated and consistent implementation of its regulatory action plan.”

I believe that the US banks want to kill the CVA risk capital charge exemption as soon as possible. They may be right about the failings in Basel III; but this argument looks like a Trojan Horse masking the real issue, which is about the ability of US banks to compete with other international banks.

Why has the CVA risk capital charge exemption so royally irritated the US banking community? And why is that community so belatedly trying to appear on the side of the good, when it neglected Basel compliance for so long?

Some elements that I have pieced together all revolve around our maligned ‘friend’, the CDS market. My personal, lay understanding is as follows:
– banks can manage their CVA exposure by taking CDS positions
– the CDS market for corporate names is substantially more developed in the US than anywhere else – and the limitations of the market other than in the US severely restrict the ability of banks to hedge the CVA exposures
– compounding the advantages for US banks, they have been, over the last decade, at the forefront of the development of risk management of CVA, e.g. by using CDS

How should we respond to this? Whilst this is still work in progress, my view is that we need to bring the debate fully out into the open (see Financial Times “JPMorgan Under Pressure in Basel Spat”) and make sure that there is real transparency about the issues and the objectives of the major players. We have started that process but there is more to be done before we can have any confidence that the CVA risk capital charge exemption is indeed safe.

I’ve spent the morning drafting the EACT’s submission to the European Commission’s consultation on the new (Basel III) capital requirements regime.  Impenetrable source documents for many of us – but for some time I’ve felt the issue was blindingly simple.

Let’s assume commonsense prevails on the need to allow corporates to continue to use OTC derivatives without having to go through central clearing and tie up real or imaginary cash to meet unquantifiable future margin calls.  If the arguments for that are accepted – and although we are not there yet the signs are positive – will legislators, regulators and civil servants really take leave of their senses and allow Basel III to reverse the exemption?

More to follow on this and I’ll post a link to our submission once it’s agreed across representatives of treasury associations in 19 countries (no kidding).  In the meantime I’m about to take a call from a US risk advisor who wants me to comment on a draft article he’s preparing that’s headed ‘What Does Europe Know About Derivatives that the White House Doesn’t?’.  Great stuff – and at the end of a 24 hour period in which the political tensions around OTC regulatory proposals seem to have been heating up – look at Senator Blanche Lincoln’s website and also try to track what Senator Saxby Chambliss has been saying (not an easy task).

This is an absolutely crucial time in the debate over the threat posed to corporates by the regulatory proposals for OTC derivatives.  On Friday there are two key events: the DG Markt team in the European Commission has a meeting with representatives from some of the key EU countries – to discuss the EC’s thinking on possible exemptions for corporates from the requirement to enter into central clearing for their transactions; and consultation closes on the EC’s paper on ‘Possible Further Changes to the Capital Requirements Directive” (consultation also closes on the underlying BIS proposals on which the EC work is based).

The significance of the DG Markt internal paper for Friday (although the paper is not available publicly it has been widely circulated over the last few days) is that there is explicit discussion on how an exemption might be presented.  For those of us that have been campaigning for this common-sense approach – so as not to destroy the risk mitigation activities of corporates in Europe – this is a huge step forward and one I welcome.  Although there is considerable concern amongst some corporates that the concept of thresholds [for regulatory intervention to require central clearing] could be intended to ‘catch’ the largest corporates, my own view is that by embracing the concept of thresholds those drafting the legislation and regulators will have to address the fundamental issue of systemic risk.

I have always argued that systemic risk arising from corporate activity is almost entirely mythical and I hope that as thresholds are debated it will be seen just how difficult it is to make a case for such risk – and therefore thresholds will prove irrelevant.  The burden of responsibility for identifying a corporate that is creating systemic risk through its activity in derivatives should lie with the regulators looking at regulated entities – such as the financial products business of AIG.

The consultation documents from the BIS and the EC on capital requirements do not make for easy reading other than by enthusiasts for the technicalities of bank capital measures.  However there is one absolutely fundamental issue and it is this that we will cover in the EACT’s response: it would be foolhardy for the bank regulators to take back what those preparing (and voting on) the regulation of OTC derivatives look likely to concede – that corporates should not have their transactions forced into central clearing.

Put at its most simple, the danger is that the bank capital changes (for the future Basel III) are structured to be so punitive that corporates find it unacceptably expensive to use bilateral OTC derivatives and therefore resort to centrally cleared transactions, with the related huge cash drain arising from the provision of cash collateral.  The challenge – and not one to be under-estimated – is to persuade the BIS and the EC to pull back from their proposed approach.

[This post was originally published on 8 April 2010 on my personal blog,

My preoccupation with the European Commission (EC) and its thinking on the regulation of OTC derivatives ratcheted up a gear dramatically today.  The EC seems to be inching towards acceptance that there must be an exemption for corporates – thereby preserving the ability of most if not all to go about their business of mitigating risk without having to cash collateralise.

It is now clear that the EC is struggling with the basis for such an exemption but seems to accept that it would be foolhardy to do so on the basis of accounting treatment (yesterday’s blog….).  The EC is talking about ‘thresholds of intervention’ and whilst some of the largest corporates may fear this, my own view is that such an approach could be workable.  It has the huge attraction of requiring the regulators to be proactive in their monitoring – not a bad thing, you might feel, given how many were asleep on their watch in the run-up to the financial crisis.

An EC internal document that seems to be widely available today everywhere other than on their own website contains some thinking that looks – at least on first reading – to be fuzzy in its use of data and in the understanding of the role that derivatives play for corporates (not for liquidity but rather for risk mitigation).  However on first reading I welcome its overall direction.  There is cursory reference to the elephant in the room that still remains – the pressure on Basel / the BIS to raise punitive capital requirements on bilateral OTC transactions – but we know that battle still has to be fought.