Can The EU Lead On Financial Reforms?

The European Parliament should be leading the development of financial regulation reform. According to MEP Dr Kay Swinburne, member of the Special Committee on the Financial, Economic and Social Crisis (CRIS), many MEPs have the belief that if the European Parliament creates good, workable legislation - and does so first - the United States will follow.

The subject of ‘regulatory arbitrage’ and it’s implications was one of the key themes at Deutsche Bank’s event on 4th May about OTC derivatives in Brussels.

An overriding fear for legislators is that should the new rules be much delayed, on either side of the Atlantic, it will provide an opportunity for financiers to move their operations or trades to the location with the weakest rules. Even if this only happens for a temporary period, it may add further systemic weaknesses to an already weak global financial system.

Dr Swinburne was keen to point out that while the level of understanding in these complex financial instuments was growing rapidly in the CRIS Committee and that much progress had been made, it was still too early to tell what direction their policies would take. She warned participants that second guessing the outcome was pointless at this stage.

Emil Paulis, Director of Financial Services Policy and Financial Markets for DG Internal Market and Services at the European Commission, explained his expectation of the path ahead. Regulating OTC derivatives is clearly a feasomely complex area and since this regulation must start from virtually the ground up, many steps will attempt to bring these contracts in line with other asset classes.

These steps have three main themes. These are:

Counterparty Risk to include the use of the Capital Requirments Directive to help assess counterparty risks and pricing, for central clearing houses to oversee or authorise transactions.

Transparency so that as much information as is possible is available to let regulators and clients see the full terms of contracts. Questions were obviously raised about the competitive nature of these markets and the implications to business models of full disclosure and the usefulness of publishing contracts that are so complex that only those involved will fully understand them.

Increased standards of Market Integrity and the prevention of market abuse. It is likely that corporations using derivatives to hedge the risks in their business will receive exemptions, but for financial firms, the rules currently in place for other asset classes should be applied.

As a part of these measures, a - very - short public consultation process is planned. With the first releases due before the summer break, the revision of market abuse rules planned for the fourth quarter of 2010, and the problems of trying to match rules and progress with the United States, the OTC arena is due for fast and important changes.