OTC dealers win reprieve as EU Parliament delays reforms; banks lobby for US/EU convergence

OTC dealers win reprieve as EU Parliament delays reforms; banks lobby for US/EU convergence

The European Parliament has postponed implementation of new rules designed to improve transparency in over-the-counter trading, mirroring a similar slowdown in US financial market reforms under the Dodd-Frank Act.

EU derivatives rules related to short selling and a switch to exchange-based trading and clearing for over-the-counter instruments will now be delayed until at least the autumn, after the European Parliament decided that it needed more time to adopt firm proposals.

The European Market Infrastructure Proposals won the backing of parliamentarians by a show of hands, but the final votes were postponed.

The International Swaps and Derivatives Association welcomed the delay: "While this decision delays adoption of a full first reading by the European Parliament, it makes it more likely that a speedy agreement can be reached at EU level on these proposals (than would have been likely had the legislative resolutions been adopted)."

Last month, US regulators put back similar proposals under the Dodd-Frank Act - set for introduction this month - as they grappled with the fine print underlying the reforms.

As progress on drawing up the details of the rules in both jurisdictions has stalled, market participants have warned of worrying divergences.

The warning is contained in a letter sent on Wednesday by eight leading trade associations - including the European Banking Federation, the Futures and Options Association, the Investment Management Association and the Wholesale Market Brokers' Association - to Tim Geithner, the US Treasury secretary, and Michel Barnier, EU internal market commissioner.

The letter warns that the extraterritorial effect of separate legislative initiatives in the US and Europe could have "significant adverse consequences" for financial and non-financial companies and for the wider global economy.

It also says overlapping rules will push up costs, "which in turn undermines the ability of firms to manage risk and makes for higher financing costs for the real economy".

The associations detail some areas where they see problems. These include duplicative licensing, authorisation and registration regimes, the extraterritorial application of margin requirements to the non-US offshoots of US financial firms, and similar dual requirements for US subsidiaries of non-US firms.

The associations suggest a "mutual recognition" system between regulators, limiting the extraterritorial reach of their rules, provided firms comply with home country regulations. They also suggest similar arrangements should apply to clearing counterparties, so that regulators agree standards for "equivalence" and can recognise CCPs that have been approved in each other's jurisdictions.

"We believe that there remains considerable scope . . . to prevent, alleviate or limit the harmful effects of such overlapping, inconsistent and ambiguous rules . . . regulators should seek to limit the damaging effects of divergence either by consultation . . . or by resolving these differences in the course of implementation of legislation," they say.

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