08 November 2013

IFR: Derivatives rulemaking in Europe

The slow pace of swaps rulemaking in Europe could leave the door open for US exchanges to rake in profits at the expense of their European rivals. (Includes comments from CFTC/Gensler.)

Andreas Preuss, chief executive of Eurex, said that there will be  growth in clearing “on a global scale, but we unfortunately will see a very different speed in the adoption of rules". “That for the market is not good news. We will certainly see some developments where people embrace interest rate swaps clearing prior to the mandate, but serious growth in the European environment will not really commence a lot before the obligation is in place.”

“The difference in rulemaking pace means Eurex has a tougher time gaining market share. The firm won’t be able to rely on the regulatory mandate the same way clearing houses in the US can.From what I’ve seen the firm is instead looking to buy up smaller firms in the market in the hope of putting together puzzle pieces to form a successful whole", said Preuss.

The new swaps rules should benefit the Frankfurt-based exchange by mandating clearing and exchange-trading of over-the-counter derivatives. But the European Markets Infrastructure Regulation, the European effort at implementing the G20 regulatory reform commitments, is lagging far behind the US implementation of the Dodd-Frank Act. The CFTC has already fully implemented a mandate forcing OTC clearing in the US, and full-blown exchange trading on swap execution facilities is expected to take off in earnest in early 2014.

Gary Gensler, chairman of the CFTC, commented on the matter.

“First there will be the continued implementation of reforms. Among the highlights is the trade execution mandate likely going live in the first quarter of 2014. Also, there is the critical implementation of the recently completed customer protection rules. The CFTC will continue pivoting from rulewriting to ensuring compliance with these reforms.

Second, it is critical that we preserve the pre-trade transparency that has been a longstanding hallmark of the futures market. The Commission finalised a block rules for swaps and soon will consider staff recommendations for a proposal on a futures block rule.

Third, we have witnessed a fundamental shift in markets from human-based trading to highly automated trading. The Commission looks forward to hearing back on our concept release on automated and high frequency trading.

Fourth, we must deal with the fact that LIBOR is more akin to fiction than fact. Through five settlements the CFTC has brought against banks, we have seen how the public trust can be violated through bad actors readily manipulating benchmark interest rates. As LIBOR and Euribor are not anchored in observable transactions, they have been and can be again readily and pervasively rigged. The work of the Financial Stability Board to find alternatives and consider potential transitions to these alternatives is critical. This will mean significant changes in the futures and swaps markets. There is a need for these reforms, though, if we’re going to protect the integrity of the markets. “

Full article

Gensler’s full speech © CFTC

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