Esma inclined to follow US FX exemption, says FSA’s Justham

The US Treasury’s likely exemption for foreign exchange swaps and forwards from mandatory clearing and exchange trading will heavily influence the decision-making of the European Securities and Markets Authority (Esma) when it comes to decide which classes of derivatives should be subject to similar rules in Europe, according to a senior UK regulator.

“Product exemption is an area where consistency is primary. The US Treasury has recently made a decision to exempt FX forwards and swaps from mandatory clearing under the Dodd-Frank Act. We need to think very hard about that in the EU context to avoid potentially creating the arbitrage issues that might arise from the discrepancies between two such large markets,” said Alexander Justham, director of markets at the UK Financial Services Authority (FSA) in London and chair of Esma’s secondary markets standing committee.

Speaking at the International Derivatives Expo in London on 7 June, Justham emphasised the main objective of derivatives regulation is to reduce systemic risk, and that it is essential only the right products are mandated to be executed on organised trading facilities in Europe. “It is critical that a trading regime targets those products exhibiting levels of standardisation and liquidity necessary to benefit from the transparency organised trading platforms will bring,” he said.

But speaking to FX Week after his keynote address, Justham said the regulatory treatment of FX contracts is not top of Esma’s agenda at the moment, despite the US Treasury’s recent decision. “FX is really not our highest priority,” he said, when asked whether FX products might exhibit the necessary levels of standardisation and liquidity to render them suitable for organised trading facilities.

Although it will be up to Esma to make technical recommendations on which asset classes should be subject to mandatory clearing, legal precedent means it will have to be the European Commission (EC) that gives the final rubberstamp on those recommendations.

Conference speakers in other panels also discussed the way in which derivatives regulations have been drafted on both sides of the Atlantic. Hannah Gurga, deputy director in securities and markets at the UK Treasury, emphasised the need for legislators to strike the right balance between pursuing increased market stability and promoting competition and economic growth. She also raised concern about the speed at which regulators want to impose new regulation. “Is a politically driven timetable achievable, given commercial realities?” she asked.

Meanwhile, Scott O’Malia, commissioner at the Commodity Futures Trading Commission (CFTC) admitted the Commission has not properly considered the cost of regulation, both for itself and for market participants.

“There is a cumulative cost in all this… have we made it too costly to clear?” he asked. “We’ve done this piecemeal, and I don’t think we’ve put a bottom line on all this. The CFTC itself is under tight budget resources; we are, I’m afraid, only investing the minimum in technology as opposed to what we should be doing. I don’t think we’ve given the regulatory cost close enough analysis.”

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