EMIR forges ahead, US revists harmonization (UPDATED)

The European Union and the UK have come to a deal regarding over-the-counter derivatives rules, reports the New York Times’ Deal Journal. At a meeting of European finance ministers, Britain’s George Osbourne won a concession preventing new European Market Infrastructure Regulation (“EMIR”) legislation from overruling national regulators when authorizing OTC trades.

The UK is home to the majority of European OTC derivatives trades, handling approximately 75% of transactions. Last week, sources said that the rule-makers were close to making a deal that was unfavorable to the British, but that the measure would pass regardless. Not only was Osbourne able to extract this concession from other European ministers, he was also able to convince the European Commission to extend regulation to exchange-traded derivatives, a market traditionally dominated by powerful German firms.

“We came here in a minority, somewhat outnumbered,” Osborne said. “Through some hard negotiation we very much improved the directive. We are going to have what we all wanted, which is more effective regulation of the derivative market.” The UK is still resisting plans supported by Germany and France to tax derivatives transactions. The UK says it will not agree to such a rule unless it is implemented globally. These changes to EMIR will now be renegotiated in the European Parliament.

UPDATE: According to Bloomberg, the EMIR draft may also require exchanges and other venues to share data on trades with rival clearinghouses. Information would have to be provided on a “non-discriminatory and transparent basis” to clearinghouses, and any refusal would have to be accompanied by “full reasons.” The proposal stops short, however, of allowing buyers and sellers to uses separate clearinghouses to complete their trades, but does allow exchanges to refuse access if the transaction poses a threat to the market.

Across the Atlantic, American lawmakers are once again worried that European and American regulatory efforts are out of synch. Barney Frank (one of the architects of the Dodd-Frank Act) and Tim Johnson, both Democrats, wrote a letter to financial regulators urging them not to rush ahead of their European counterparts: “U.S. regulators should work with other international regulators to seek broad harmonization of appropriately tough and effective standards. This can be accomplished by an appropriate staging of the adoption or implementation our rules abroad.”

The letter, which was sent to the Federal Reserve, CFTC, SEC, and FDIC, specifically mentioned new margin requirements for end users and major swap dealers. Lawmakers (and bank lobbyists) worry that strict margin requirements will put U.S. banks at disadvantages to their European counterparts. “We are concerned that the proposed imposition of margin requirements, in addition to provisions related to clearing, trading, registration, and the treatment of foreign subsidiaries of U.S. institutions, all raise questions about the consistency with Congressional intent regarding [derivatives reform]” wrote Frank and Johnson. The CFTC, at least, has recently pledged to review and harmonize many proposed Dodd-Frank rules with the Europeans.

Read more about this Congressional letter.
Creative Commons License photo credit: C. G. P. Grey

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