New rules designed to kill OTC market, says European regulator

Central Bank of Ireland adviser says reforms will cause an “Ice Age” in the derivatives market.

Legislators have developed new derivatives regulation with the intention of killing off the over-the-counter derivatives market in its current form, according to Giuseppe Insalaco, senior adviser on clearing and settlement regulation at the Central Bank of Ireland.

Speaking during a panel discussion at Risk’s OTC Derivatives Clearing Summit Europe in London earlier this week, Insalaco was asked by a fellow panellist whether the reforms had been designed specifically to kill off the OTC market. “Isn’t that obvious?’ replied Insalaco. “We are trying to push OTC to futures as much as we can. The signs are all there. It is not a secret.”

Other regulators have been less open about this aim, but Insalaco said the absence of central counterparties (CCPs) in Ireland meant he could be more forthcoming. “This is the good thing about having a regulator that doesn’t have a domestic CCP or domestic clearing members. Therefore, we don’t have to defend any domestic vested interests. If you look at what regulators are trying to do, then clearly if it is not completely to kill it, it is definitely to reduce it to where it is absolutely essential.”

The new rules include the European Market Infrastructure Regulation, which will require standardised OTC derivatives contracts to clear through CCPs, and Basel III, which – among other things – introduces a new credit valuation adjustment capital charge. Taken together, the regulations will increase the cost of trading derivatives significantly, say participants.

Many derivatives users are looking to adapt their businesses to meet the new rules – but Insalaco said this misses the point. “I think what regulators are bringing about is something akin to a new Ice Age. London will be under a new ice sheet and there will be mammoths in France, but people are trying to figure out how to protect their rose-beds from frost. This is not the point. The point is we want to change how things are done, because the way they were done before is clearly wrong.”

Other panellists claimed they had received slightly different messages from other regulators – which prompted speakers to complain about the lack of a joined-up approach from supervisory authorities.

“We have intergovernmental squabbling and intra-governmental squabbling, so we have part of the teams in the regulatory unit saying we need to clamp down on things and hoard liquidity, and the other half saying we need to expand money supply and increase growth,” said John Wilson, former global head of OTC clearing at Royal Bank of Scotland.

“Consequently, we have chaos. It is so complicated that I’m not sure the architects of policy have a clear view of what they are trying to implement, or if they do they’re not really good at writing it down to achieve the desired objectives.”


This article first appeared in Risk Magazine

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