On 8th March 2016, the European Supervisory Authorities (EBA, EIOPA, ESMA - ESAs) published its final draft Regulatory Technical Standards (RTS) outlining the framework of the European Market Infrastructure Regulation (EMIR)1.
Whilst some may consider this progress, it is unfortunately yet another indicator of the significant challenges the international finance industry – both financial institutions and regulators alike - faces in successfully addressing risk mitigation from OTC Derivatives.
Whilst the broad parameters of the G20 reform programme to increase transparency and limit excessive and opaque risk-taking make complete sense and are welcomed, the reality paints a different picture:
(i) In August 2014, The International Swaps and Derivatives Association (ISDA) requested a two-year period after the publication of the full set of final rules to put margin arrangements in place.3 Even with this recent announcement, the industry still does not have this full set of final rules, and we still await these from the HKMA, MAS, US SEC, JPN FSA and Australia. If it has taken this long to define the final rules, surely it has to be understood the implementation phase also needs time to get it right.
(ii) As it becomes increasingly apparent that regional differences in the final rules will cause market fragmentation, impaired liquidity and more generally, unintended consequences; the question has to be asked: as regulators realise the impact of unharmonised rules, will some of the published final rules become “pencilled final rules” rather than “dry ink final rules”? Without such a “double-take” one creates possibilities for regulatory arbitrage and an uneven playing field as between competitors in different jurisdictions. Substituted compliance would of course, help ease such a scenario. However one only needs to look at the rather scenic regulatory journey on equivalence for central clearing counterparties (CCPs) to realise that reaching equivalence is a tortuous number of months of uncertainty for market participants, as to exactly what they are required to do.
The significance of the operational changes and documentation challenges associated with margin reform are not to be underestimated. And whilst the financial institutions themselves are hardly faultless, if the industry collectively is to truly address this critical aspect of international banking then it is now high time for the regulators to take greater responsibility for providing clear and coordinated guidance, as well as time to sufficient time to implement. Getting the implementation wrong simply makes the financial system a less stable place rather than the safer haven underpinning the goal of the regulation.