Something has to be wrong with the way regulation is created, if time and again it gets delayed and no-one can be really sure which arm of legislature is the architect of that delay. Failure to keep pace with the US on implementing rules for initial margin and variation margin on uncleared swaps is just the latest in a list of shortcomings by Europe.
To many in the market, the letter last week by the European Securities and Markets Authority (ESMA) and two other ESAs, urging the European Commission to speed up may well feel like a case of the pot telling the kettle to be cleaner. On first glance, the message appears to be that the Commission should heed ESMA’s warning and not dither on margin rules as much as it has.
But ESMA’s missive — though not explicit — implies more than it says directly.
ESMA, the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) went off-radar for over six months during the rule-writing process, occasioning numerous complaints and concerns for bankers, lawyers and other market participants. The ESAs only published the final regulatory technical standards in early March — giving the Commission little time to approve the rules ahead of a September 1 deadline for major banks to adhere to them.
Little surprise then that the Commission decided on June 10, after three months of deliberating, that it did not have time to meet the deadline itself. Instead, the Commission said that it would try to get the rules in place by mid-2017, which would also overshoot the March 1 deadline for the wider market to start paying variation margin on uncleared swaps.
There is no indication so far that other regulators — notably in the US — are prepared to delay their own roll-out to accommodate Europe. But market participants believe this will put US banks at a disadvantage from September 1 and create unwarranted market complexity from March 1.
It is a baffling turn of events, therefore to find ESMA and the other ESAs echoing and expanding on many of these complaints in their letter.
It is well understood that ESMA is too short-staffed to write such regulation at breakneck speed, and there is plenty of sympathy for the association, given the amount of work that it has to get through. But the ESA’s letter appears to suggest that the Commission has been instrumental to the margin rules delay all along.
It presents a broadside to the Commission’s insinuation that the original timeline it was given would not have allowed the standards to be finalised by September. The ESAs rubbish this claim by stressing firstly that the Commission set a deadline for the submission of the RTS at end of February. The ESAs delivered the draft standards one week after that.
But the ESAs go on to add that the “European Commission has been involved in the entire process of the development of the standards”. Moreover, that the ESAs “went through an extensive early legal review with the objective of streamlining the adoption process by the European Commission”.
The ESAs go on to add that they worked closely with the Commission during the policy making process and detail numerous ways they sought to achieve balance among the various components. This included “one discussion paper, two public consultations, a detailed analysis of the technical aspects, intensive interactions with industry stakeholders and third-country authorities”.
Somewhere in this professed co-ordination there has been a big misunderstanding about the importance of having the margin rules in place — or how much work is required to get there. The ESAs are right that this hold-up cannot have been simply a matter of a week’s delay on their end. But both they and the Commission need to find an honest middle ground and work out how they can work together better in future.