GlobalCapital took its reporter’s notebook to possibly the most European place there is last week — Luxembourg, home of the European Investment Bank, the European Court of Justice and the Eurobond market, a fitting venue for the International Capital Market Association’s AGM (though not, it turns out, a great party town).
The tiny country’s finance minister assured the assembled company that Luxembourg was unlikely to contemplate an EU exit or radical anti-globalisation candidate any time soon, and made time for a few wry digs at the United Kingdom’s increasingly unhinged negotiating stance on Brexit.
But most interesting was Steven Maijoor, head of Europe’s securities regulator, ESMA, who called for a rationalisation of the patchwork of frameworks for granting some kind of third country in relation to the European Union.
At the moment, there are multiple pieces of European regulation including some kind of third country concept.
There is equivalence, there is recognition, there is passporting and there is endorsement. All of these have different legal bases, and a different scope, and apply to different activities. It’s not pretty, and should be a rebuke to those that hope equivlance can be expanded and used as a basis for financial services firms in the UK to access EU markets after Brexit.
Maijoor noted, too, that whatever system Europe adopts for “third country” status, it’s going to cost a lot of money for European regulators to approve a massively expanded list of firms that want it. Maijoor therefore also argued that ESMA should charge firms for this recognition.
Finally, there was a modest intervention in the ongoing fight to locate euro clearing in Europe — pointing out that there are limits to the extent that EU supervisors can trust third country regulators to have the best interests of Europe at heart — so vital services, such as LCH’s giant euro-denominated interest rate swap business, need to be physically inside the European Union after Brexit.
Maijoor had plenty of other work to keep him busy too — the European Commission proposed a set of revisions to EMIR, the centrepiece of derivatives regulation in the Union, on Thursday. At stake is a fight over whether pension funds have to clear derivatives or not, as well as a whole raft of other changes, such as restrictions on whether securitizations swaps can be cleared.
Pension funds hope they can keep their existing exemption from clearing for as long as possible, with the hope that, given a long enough grace period, the EU will simply drop the plans by the time they’ve come around.
But some traders argue that pension funds are receiving worse prices from their counterparties thanks to a distaste for clearing, and would be better served by an earlier, voluntary move.
Whatever else happens, collateral markets are going to be important — to support derivatives trades through initial and variation margin, to meet regulatory requirements for liquidity, and to demonstrate financial strength to counterparties.
Some see the market as basically functional, but increasingly, at quarter and year end, European collateral markets all but collapse. Regulation must take some of the blame, but the public sector purchase programme — and a lack of support from European DMOs and central banks — has also been hammered by repo market participants.