Sunday, January 12, 2014

Praising CFTC-EU Path Forward on Derivatives Regulation, FCA’s Wheatley says Many Details Remain to be Worked Out

There will be a number of regulatory challenges ahead in 2014 around the European Markets Infrastructure Regulation (EMIR), the E.U.’s derivatives regulation regime that is an analog to Title VII of the Dodd-Frank Act, said Martin Wheatley, the Chief Executive of the U.K. Financial Conduct Authority. The cross-border issues associated with derivatives regulation raise the fundamental question of whether regulators should operate independently on global issues so that they can intervene quickly in the national interest, or whether they should find international solutions to international challenges. In remarks at the ICI global trading conference, Mr. Wheatley cautioned that a failure to have cross-border harmonization of derivatives regulation would open the door for regulatory arbitrage; would mean less protection for end-users; and would raise the specter that a participant in the derivatives markets could easily be subject to multiple and different regulatory regimes

The FCA chief praised the CFTC and European Commission for committing to a Path Forward agreement based on mutual recognition and substituted compliance. At the same time, he reminded that the Path Forward remains a roadmap with significant points of detail to work through, particularly details relating to trading venues in the EU and US used by firms in both jurisdictions as major conduits for transatlantic derivatives trading. The FCA, along with the EU, is pushing hard for this approach to be based on mutual recognition of differing regulatory regimes. This calls up the broader issue of the recognition of equivalence between different international regimes. It makes good sense for regulators to accept compliance with foreign rules for cross-border trades, he noted. ESMA has already authorized the first trade repositories under EMIR and, as of the February 12, all derivatives trades, both exchange traded and over-the-counter, falling under the jurisdiction of EMIR will have to be reported to one of ESMA’s recognized trade repositories.

The FCA has started to review firms’ compliance with EMIR in terms of the business conduct regulations already in place, and will also be checking firms’ preparations for the February start date in the coming weeks. He advised firms to ensure that the relevant data is available internally, as well as arranging direct access to a trade repository or delegated reporting facilities. He also encouraged firms to get a legal entity identifier as soon as possible, which should be a relatively quick and straightforward process. This is a vital to the overall success of reporting to trade repositories.