MEPs see failure in derivative rules

By Rebekah Tunstead | 4 June 2019

MEP and vice chairperson of the economic and monetary affairs committee at the European Parliament Kay Swinburne urged caution to derivative operators who wish to increase volume because EU policy makers believe rules to move over-the-counter derivatives to the clearing space has failed due to derivatives having grown disproportionately to their underlying assets, she said on a panel discussion at a conference in London this week.

“The reality is that when we talk about increased volume, in the year of derivatives per say my colleagues in continental Europe, and certainly on the European Parliament’s team that have actually legislated for derivatives over the last decade would probably say that the policy has failed because the intention was to move the derivative market underlying to the underlying, rather than the derivative market expanding even further. They always felt that the derivative market had actually grown disproportionate in size to the underlying asset trading on the markets,” said Swinburne at a panel discussion at the FIA’s IDX in London this week.

“I would urge caution if that is your intent as derivative operators to increase volume and to move things increasingly in that direction, I don’t necessarily agree with the policy that should be to diminish it but that is actually where the vast majority of my policy colleagues think,” she said.

On May 2, the Bank of International Settlement published statistics on OTC derivatives for the second half of 2018. The report stated that the notional total of OTC derivatives dropped $51trn from June to December last year. This was due to a $44trn decline in interest rate derivative contracts.

Proprietary trading firms are struggling to give liquidity to markets said Garry Jones, director of Horatio Ventures and chair of the panel, and questioned why such firms had been given similar capital requirements as banks.

Swinburne responded that regulators were afraid of the unknown shadow banking space.

 “There is a simply answer as to why, because the shadow banking sector has grown so disproportionately large to the conventional banking sector, that it is now been regulated so heavily post the financial crisis. Shadow banking puts the fear of everything into policy makers because it’s that grey space that they don’t know what it is,” said Swinburne.

Mark Wetjen, managing director & head of global public policy at DTCC expressed concern that the Commission had yet to come to an equivalence decision regarding Brexit.

“We do still need an equivalency decision made from the European Commission, that is rather important to our business,” he said.

The EU Commission would be slow to come to such a decision not only because of the uncertainty of Brexit, but also because of the recent European elections, according to Swinburne.

“Equivalence from my perspective having been involved on the EU’s institutional side, equivalence decisions will not be made in a hurry because until they know where Brexit is going and heading, and what the future relationship will be between one of the world’s largest financial centres, and the EU it’s leaving, they will not want to make any major equivalence decisions anywhere in order not to pre-empt, and prejudge the outcome of that future relationship,” said Swinburne.

“Equivalence decisions will be put on ice not only because of Brexit, but also because of the timing of the new Parliament, the new Commission, and the decisions of equivalence taken by the Commission. A new Commission President will set a very different tone potentially to the out going one, and just like in any political system, they are a bit of a lame duck going out between now and October when the new Commission really authorized to have their new priorities and new policies,” she said.

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