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For regulation, Europe needs further action on no-action

By Ross Lancaster
02 May 2017

European regulators are finally on the road to creating suspension mechanisms similar to those used in the US, an evolution that should not stop at clearing.

Draft legislation seen by GlobalCapital this week shows that the European Commission is proposing mechanisms to allow the suspension of clearing obligations for some market participants on financial stability grounds.

European regulators have long cast an envious eye across the Atlantic at their US counterparts’ ability to grant grace periods on sprawling and problematic regulation. 

Earlier this year, ESMA chief Steven Maijoor publicly set out the need for ‘no-action letters’, or an equivalent, that European regulators could use to stem sharp drops in liquidity caused by inflexible rules.

Just two months ago a situation crying out for such a mechanism passed without any such sign of flexibility.

While the CFTC issued a no-action letter allowing swap market players an extra six months to comply with variation margin rules, European regulators opted to grant leeway on a case-by-case basis.

Some observers have labelled this approach as clumsy and they have a point. Mixing tough rhetoric with soft practice, enacted on a bespoke basis, gives an impression of muddling through and fudging.

European regulators can surely keep on that way. But if the EC’s ambitions to create “integrated, open and efficient European financial markets” are to be realised, evolution is necessary.

So this week’s proposal should be the root of broader suspension mechanisms that can be implemented quickly and are applicable to any regulatory situation. 

For a derivatives industry struggling to adapt to reams of incoming regulation, such an instrument would create room for pragmatism when new rules come in. Unworkable proposals can be stalled, pending review or clarification — without hurting the market.

As Maijoor also pointed out, tools such as no-action letters could prevent a migration of trading volumes towards regulators that are seen as more flexible in their approach.

Regulators across the world left it late to officially respond to industry warnings that a vast majority of the swaps world was unprepared for variation margin on March 1. That deadline passed without the mass market shutdown predicted by some. 

But with annual phase-ins of initial margin requirements, seen as even more burdensome than variation margin by some, due until 2022, the need for a broadly applicable European no-action letter is no less urgent.

By Ross Lancaster
02 May 2017