Tuesday, May 29, 2012

ESMA Executive Director Emphasizes Importance of Cross-Border Convergence of Derivatives Regulation

As the EU finalizes the regulation of OTC derivatives this year, it is important that there be cross-border harmonization and convergence with the derivatives regulatory regimes of other jurisdictions, said Verena Ross, Executive Director of the European Securities and Markets Authority. In recent remarks, she noted that there is no alternative to close international cooperation, both in the setting of standards and in the execution of day-to day-supervision, if regulators and policymakers want to achieve an efficient system for the global financial markets. Since no single regulator can seek to regulate global financial markets from one location, she reasoned, regulators will need to rely on equivalence, mutual recognition and cooperation in order to make progress.

In coordination with the European Commission, but also in close cooperation with national regulators, ESMA plays a central role in ensuring that Europe speaks with one voice vis-à-vis regulators outside the European Union. The Executive Director pointed out that a main reason for cross-border regulatory convergence is to avoid regulatory competition whereby regions end up with fundamentally different, and potentially lower standards and ultimately a more risky environment for everyone.

The initiatives related to OTC derivatives are a good example of this need for convergence and cooperation at a global level. In Europe, the result from the G20 commitments has been the European Market Infrastructure Regulation (EMIR), and to a degree the provisions on derivatives transparency in MiFID 2. The same issues are occupying EU counterparts in the US and Asia.

EMIR introduces a reporting obligation for OTC derivatives, a clearing obligation for eligible OTC derivatives, measures to reduce counterparty credit risk and operational risk for non-cleared OTC derivatives, common rules for central counterparties and for trade repositories, and rules on the establishment of interoperability between central counterparties.

Now that EMIR has now been agreed upon by the European Parliament and the Council, noted Ms. Ross, ESMA is due to deliver draft regulatory and implementing technical standards under EMIR. Indeed, the EMIR standards will dominate ESMA’s agenda for the next months in view of the number and complexity of the technical standards to be delivered. There will be around 40 standards, said the ESMA official, and most of them will require careful consideration and often difficult judgments to be taken.

Regarding the derivatives regulations and standards, ESMA intends to publish a consultation paper in June and hold a public hearing in July to take the work forward. Since EMIR and ESMA’s technical standards contain major changes for financial markets participants, the official hopes that there will be active public engagement in the upcoming consultation, despite the fact that due to a deadline of the end of September ESMA will need to conduct the consultation during the summer.

ESMA is due to deliver the standards to the European Commission by the end of September. It is expected that the Commission will endorse them by the end of the year, to ensure that the EU meets the G20 commitments on moving OTC derivatives markets to be centrally cleared. At the Pittsburgh Summit in 2009, the G20 leaders agreed that by the end of 2012 all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties, that OTC derivative contracts be reported to trade repositories, and that non-centrally cleared contracts be subject to higher capital requirements.