The Alternative Investment Management Association (AIMA), the trade association for global hedge funds, warned recently that, while it is strongly in favour of mandatory central clearing of eligible over-the-counter (OTC) derivatives contracts, the way the EU is going about the drafting of legislation on this theme is plain wrong.
AIMA fears that draft EU legislation, as set out in the proposed European Market Infrastructure Regulation (EMIR), which is designed to set up the regime for mandatory central clearing of derivatives, is creating new barriers to business. The EU’s earlier work on the alternative markets directive, which was designed to regulate the hedge fund industry, had been heavily criticised by AIMA for putting up barriers between hedge funds headquartered inside Europe and those headquartered elsewhere in the world. Now certain provisions in EMIR “could in effect exclude EU-established financial service providers from using central counterparties (CCPs) which are not located in the EU,” AIMA says.
The call from AIMA for a rethink of the clearing provisions in EMIR came shortly before a crucial vote on 24 May by the European Parliament’s Economic and Monetary Affairs (ECON) Committee. The text going before ECON would only permit third country CCPs to provide clearing services to EU entities if the CCP concerned managed to obtain authorization from every one of the EU’s 27 states individually. The opportunities for one state to block any external CCP would place huge obstacles in the path of any financial services provider who wanted to use that CCP.
Of itself this could impact derivatives contracts between EU financial services providers and anyone outside the EU with whom they wanted to engage in a derivatives contract, if the other party wanted to use a CCP located in their country. The European Commission would also have blocking powers in that it would have to be persuaded that the legal and supervisory arrangements of the CCP’s home jurisdiction were “equivalent” to those contained within EMIR. The whole thing as stood was a typical piece of EU overly prescriptive and overly restrictive drafting. AIMA also found a variety of other conditions in the draft text setting out rules that third countries must meet in order for their CCPs to be able to obtain EU authorisation – none of which, according to AIMA, bore particularly on the prudential regulation of CCPs. The whole text, in other words, ended up looking like a piece of crafted protectionism for EU-based CCPs.
Commenting on the draft legislation, AIMA CEO Andrew Baker said:
“AIMA is supportive of open international markets and opposes measures which could result in the erection of unjustifiable barriers to international trade. We believe it is important that, in particular, counterparties in the European Union and the US can still trade freely and use each other’s financial services. We believe that it is important that the international nature of the OTC derivatives market is maintained and that any unnecessary restrictions on international trading are avoided.
“What is particularly troubling about these proposals is that they go beyond OTC clearing and could potentially capture CCPs which clear shares or bonds. If that were the case, we would need hundreds of equivalence decisions or face the possibility that EU financial services providers would not be able to trade abroad. We would encourage representatives of the different European bodies to meet with non-EU regulators in order to find pragmatic solutions on recognising third country central counterparties in Europe as well as to limit clearly the scope of this to the G20 agreement on OTC derivatives.”
ECON took many of these points into account in the amendments it suggested to EMIR. However, progress on EMIR has now gotten bogged down over precisely Baker’s point about its potential extension to other contracts beyond OTC derivatives. EMIR was due to be approved before during the third quarter of 2011, but sharp differences of opinion between UK and German ministers at the Council of the European Union’s Economic and Financial Affaris Council (ECOFIN) on this issue are currently proving intractable. The sticking point is the possible inclusion of exchange-traded derivatives in EMIR.
The delay has prompted a rather good quote from Michel Barnier, the EC internal markets commissioner, reported by Dan Barnes in The Trade. Barnier said: “We need to go further faster. The markets move faster than the wheels of democracy,” he warned. Indeed they do…
Further reading on AIMA, hedge funds and derivatives:
- Hedge Fund Challenges Extend Beyond Regulation by Kevin Burrows
- Carrying Out Due Diligence on Hedge Funds by Amarendra Swarup
- When Form Follows Function: How Core–Satellite Investing Has Sparked an Era of Convergence by Christopher Holt
- Staying in the Dark about Derivatives Will Bring Economic Collapse, by Hernando de Soto
Tags: AIMA , Alternative Investment Management Association , Andrew Baker , CCPs , central clearing , Dan Barnes , derivatives , ECOFIN , ECON , Economic and Financial Affairs Council , Economic and Monetary Affairs Committee , EMIR , EU , European Commission , European Market Infrastructure Regulation , G20 , hedge fund , hedge funds , Michel Barnier , OTC , OTC derivatives , The Trade