By Andrew Douglas
Anthony Belchambers, CEO of the Futures & Options Association (FOA)
As part of the global framework of derivatives regulations resulting from the 2009 G20 meeting in Pittsburgh, the European Market Infrastructure Regulation (EMIR) is unique in requiring the reporting not only of over-the-counter (OTC) derivative contracts, but also Exchange traded derivative (ETD) contracts.
Andrew Douglas, Managing Director and head of DTCC Government Relations for Europe and Asia, recently spoke to Anthony Belchambers, CEO of the Futures & Options Association (FOA), the European industry association for more than 160 firms and institutions engaged in derivatives business, based in London, to get his view on this and other issues relating to the implementation of EMIR.
Q: How is EMIR implementation proceeding?
A: Everyone understands the political pressures and the urgency driving implementation of EMIR, but there has to be a dose of operational realism here. For example, the Futures & Options Association (FOA) has a number of implementation support projects covering, particularly, trade reporting and the introduction of new segregation models – all of which have serious, complex and protracted IT, documentation and re-education consequences. Change has to be delivered robustly and safely, but that takes time and requires certainty – rather more than is currently on offer.
Q: ESMA recently confirmed that the deadline for reporting will not be extended. Do you think the deadline should have been extended?
A: ESMA wants to make sure that the requirements to report exchange-traded derivatives are proportionate and relevant. They know that there is a problem here and we very much appreciate their readiness to apply to the Commission for an extended timetable. To answer your question, is delaying the deadline necessary? Absolutely.
What is important is to inform firms how much time they have got and to give them the necessary clarity to be able to comply with ESMA requirements – but, absent any extension to the timetable, trade reporting can only be on no more than a “best efforts” basis because of the continued disfunctionality of some of the requirements.
Q: What is the biggest problem when it comes to the reporting of exchange trades versus OTC – is it simply the data?
A: Yes, it is largely data-driven. The process was designed for the reporting of OTC contracts, and there are many data fields to be completed that are inappropriate. The last thing we want to do is clutter the regulatory authorities with useless data.
Q: European regulation states a number of specific requirements, such as dual reporting or reporting of exchange traded derivatives. Do you think Europe’s requirements could be adopted by regulators globally?
A: As drafted, I think not. However, the question of converging regulation and regulatory processes is critical, providing the process of convergence generates a proportionate outcome. Clearly, trade reporting is key to identifying areas of market manipulation. Every effort should be made to prevent unnecessary duplication. However, the time will come when transaction and trade reporting are merged into one process.
Q: Is there too much data?
A: Sorting out the wheat from the chaff is critical for effective data analysis. Trouble is we are long on chaff.
Q: What other challenges do you think need to be addressed?
There are many. Perhaps the first one is to create a whole new relationship between the regulatory authorities and the regulated community of firms. Regulators should really be in the business of setting targets and objectives in line with their public policy responsibilities and then leave it to the firms to make implementation recommendations and then (on a monitored basis) to deliver on those objectives in the best way they can but within practical timetables.
Secondly, in a global environment, regulators need to be much more pragmatic about recognizing third country structures and processes. Cross-border access is critical to growth and to the competitive provision of products and services. That means moving away from siloed national regulation of global business. While the setting of international standards has generated a high degree of commonality in the post-crisis repair program, differentiated implementation of those standards, extra-territoriality and the failure to deliver meaningful levels of substituted compliance means that there is one G20 objective – namely, to avoid “turning inward” – that is simply not being addressed. This has to change.
Q. Do you think we will be able to address the issue of extraterritoriality?
A: If we are to get anywhere on this issue, regulators have to afford more generous recognition of rules’ differentiation. We started off with the term “strict equivalence,” then it became “equivalence” and now there is the parallel use of the word “comparability,” which makes much more sense. Strict equivalence is simply not achievable. Comparability, on the other hand, recognizes differentiation in rules as long as there are shared objectives, outcomes and public policies targets.
The first test is to look at the overarching regulatory framework to determine whether or not there is sufficient comparability. The second test is to identify, via a regulatory gap analysis, which rules are capable of accommodating substituted compliance. Finally, there is the issue of cooperation in the area of supervision and enforcement and that requires home state regulators to be satisfied with the resources, expertise and capability of a host state regulatory authority. This means that, even if the regulatory framework and a large percentage of the rules are broadly equivalent, operational inter-reliance may not be achievable if the regulator responsible for those rules does not have the capacity or capability to adequately supervise or enforce them.
Q: There seems to be a view that IOSCO should take on a kind of world trade organization role in terms of acting as a mediator. Do you support this view?
A: Yes, I do support it. IOSCO does not carry out any supervisory role and so has no rules’ positions to defend. It is well used to building up consensus amongst its 100-plus member Commissions and is the only organization that can deliver the kind of granular conduct and market infrastructure standards that can match the work of the Basel Committee in developing prudential standards. Developing a more harmonized approach in Europe required the Committee of European Securities Regulators to become ESMA with its significantly greater powers and authority to develop pan-European harmonized regulatory standards. The lesson is there. IOSOC’s standards must, of course, become more granular if they are to provide an effective foundation for regulatory recognition and it may well need more carefully defined investigative and dispute resolution powers. However, getting the balance right here is important because some jurisdictions may be wary of giving up regulatory sovereignty, no matter how pragmatic that may be in a global market place.
Q: Can you update us on the proposed merger between the Futures Industry Association FIA and FOA?
A: Yes. Each of FIA and FOA and FIA (Asia) will continue to have their own boards, membership and budgets and will retain autonomy to deal with issues within their own regions. The purpose is to build consensus and share resources and, to that end, the new FIA Global will be responsible for coordinating the activities of its three affiliates and taking forward, in its own name, issues which have a significant international dimension.
Q: How important is it to have a transatlantic bridge to ensure a harmonized voice?
A: Delivering an accessible, smooth running and coherently regulated transatlantic market is critically important, bearing in mind that, at the last count, 70% of the world’s financial services trade crosses its borders. At the moment, it is bedeviled by compliance complexity (which itself is compounded by the inability of the CFTC and the SEC to adopt the same approach towards derivative markets for which they have shared responsibility), high cost and often unnecessary barriers to market access – all of which undermine the capacity of the transatlantic markets to be globally competitive.
Q: Are regulators in Asia waiting to see how the U.S. and UK resolve these issues?
A: Yes, but it should not be assumed that they will follow Western regulatory initiatives. Many Asia-Pacific countries see the crisis as primarily a Western problem. That means they will not necessarily follow our program for regulatory and market change and, even where they do, different frameworks of legislation and market practices mean there will be significant differences. It is also worth bearing in mind that, quite understandably, Asia Pacific countries are hungry for growth and keen to attract business to their own financial service centers and, while that should not be construed as a prescribing a dive to the regulatory bottom in order to gain those advantages, they will be wary about introducing any rules that are not properly justified and which could be business deterrent.
Q: Are you concerned about the risk of regulatory arbitrage?
A: Not particularly, because I am not convinced that regulatory arbitrage is necessarily a bad thing. While there is a perception that regulatory differences are not a sufficiently good reason to justify relocating businesses, the fact is that, like tax, capital and employment law, excessive regulation is a big driver for relocation, providing the numbers stack up. That risk of business relocation is a healthy discipline on those regulatory authorities that have overzealous change agendas. As an aside, it is often assumed that regulatory arbitrage means that business will relocate to a poorly-regulated environment. While, to some extent, that may be true, the desire to relocate is often driven by the simple need to conduct business in a more proportionately regulated environment – and that is not the same thing at all.
Q: How important is it for regulators to share expertise?
A: Very – it is the difference between saying “this is how we should do it,” rather than saying by decree “this is how you should do it.”