Clock is still ticking despite signs of progress towards regulatory harmonisation for the OTC derivatives industry.
The varying pace which the provinces and states in Canada are adopting G20 recommendations only serves to underscore the challenges to achieving global harmonisation. Much of the securities and commodity markets regulation in the country is managed at the local rather than the federal level which can paint a confusing picture. However, many are beginning to move in the same direction and there are also signs that the US and Europe may finally be ready to put some of their regulatory cultural differences aside.
Cross border issues, most notably OTC derivatives reform, were top of the agenda at the recent meeting in Ankara between G20 finance ministers and central bankers. The US Commodity Futures Trading Commission (CFTC) and the European Securities and Market Authority (ESMA) have had a long running dispute over their inability to recognise each other’s rules on the clearing of OTC derivatives and patience is wearing thin.
Governments as well as market participants have been taking national regulators to task for their failure to find common ground. In fact, in early September, the World Federation of Exchanges wrote a letter to EU Commissioner Lord Hill, criticising European authorities for the length of time it has taken them to recognise a foreign clearing house. The trade group urged the Commission and other European policymakers to expedite the equivalence determinations in order to avoid the negative impacts, most notably fragmented global liquidity in the OTC derivatives markets.
There is some hope on the horizon and progress is slowly being made particularly on the smaller issues. For example the International Organisation of Securities Commission’s (IOSCO) consultative report in August proposed a global harmonisation of how identifiers are generated for trade reports while ESMA launched a consultation canvassing industry opinion on whether clearinghouses should require a two day period of collateral being held in the event of a default, or whether a one day period would suffice. This has been one of the major bones of contention between the US and EU and if ESMA can change its views while saving political face, it will go a long way in lifting a major roadblock.
Time though is of the essence. It may not seem like the clock is ticking since the deadlines have been extended yet again but before we know it, it will be April 2016 and mandatory clearing of interest rate derivatives will be upon us. Market participants should take advantage of the extra breathing space and finally hammer out a deal. Waiting until the last minute will only make the divisions more entrenched and fuel the uncertainty which will benefit no one.
