Yesterday was a big day for us regulatory schmoozers. The European Commission released two consultation papers: the long awaited proposals on Derivatives and Market Infrastructures and a shorter document on short-selling. The Derivatives and Market Infrastructure paper will generate the European Market Infrastructure Regulations (EMIR) draft. EMIR was previously known as EMIL the redesignation indicates that the legislation will be a regulation rather than a directive this is a very important distinction as regulations cannot be locally interpreted. Previous regulatory initiatives such as MIFID a directive have proved that local interpretation leads to gold-plating, watering down and patchy implementation. Not anymore. Both consultations have a very short 1 month response period as the draft legislation has been promised for September.
The EMIR consultation focuses on OTC derivatives, CCPs and trade repositories. CSDs have been excluded as they will be dealt with in another piece of upcoming legislation the Securities Law Directive. EMIR has been widely trailed and doesnt contain any surprises however there are some key areas of interest.
Firstly it does not cover the trading issue. This is in marked contrast to the US draft laws which refer to Swap Execution Facilities and enshrine the concept of exchanges or trading platforms for OTC products. The US regulations also define scope by referring to major swap participants without offering a definition. In contrast the Europe proposals are all inclusive but will contain a limited opt-out for corporate end-users if they do not exceed a (yet to be defined) quantitative threshold. The US proposals also contain a hotly debated provision on the separation of swaps desks from the parent bank. This idea has been explicitly ruled out by the European Commission. Another notable issue is the vexed subject of interoperability. Just two pages of the 25 page document refer to this issue. It is proposed that CCPs will have legal rights to request interoperability but there are no firm proposals on how it can be achieved. The issue has not moved much further forward.
The proposals on short-selling also show that much informal consultation has already taken place. The issue is a political hot potato especially in the European Parliament and clearly has a strong political element. The intention is twofold: ban naked short selling of equities and restrict trading of CDS contracts. The paper thankfully acknowledges that short-selling is a legitimate practice but focuses on the more disruptive elements of the process.
Both consultations demonstrate a rapid maturity of the policy makers. At the outset of the crisis there was an unrealistic political expectation that OTC markets and short-selling could be eliminated. Whilst the market may not like all it sees both proposals look like theyll win grudging approval.