European Trade Groups to ESMA: Exempt Forex From Central Clearing
European buy and sell-side trade associations have asked Europe's securities watchdog, the European Securities and Markets Authority (ESMA), to clarify its stance on whether or not foreign exchange derivative contracts will fall under a new regulatory mandate for centralized clearing of swap transactions.
At issue is the possibility that differences in US and European legislation could lead to regulatory arbitrage and make compliance pretty challenging. The consensus among the 131 comment letters published by the ESMA: FX contracts should be exempt from any European rules requiring swaps be cleared through a central clearinghouse.
While the U.S. Treasury is expected to allow forex swaps and forwards to be exempt, the ESMA has not disclosed whether it will follow suit. The ESMA must present a final draft of how the European Markets Infrastructure Regulation should be implemented to the European Commission by September 20. A consultation period on some of its proposals ended on August 5.
"There is a continuing and undesirable lack of clarity in the position of FX transactions, which it would be helpful if ESMA could dispel," says the Investment Management Association, the UK trade group in its letter to the ESMA. "We do not believe that FX contracts are exactly comparable to other OTC derivative contracts."
Likewise, a group of four industry associations including the International Swaps and Derivatives Association and the Association of Financial Markets in Europe writes: "We have understood that ESMA was considering following the US standards of excluding FX contracts from clearing calculations and we would like ESMA to formally confirm such a position as this would enable market participants to better plan for compliance and would prevent unnecessary expense being incurred and preparatory work being done in relation to contacts that will not be covered by the scope of the regulation."
Established in January 2011, ESMA will be responsible for implementing the nitty-gritty rules to implement EMIR--Europe's new pending legislation covering the swaps market. While regulations in both the US and Europe follow the broad guidance of the Group of 20 industrialized nations technical differences remain which could create operational havoc for swap traders whose systems must keep track of the differences. In its new role EMIR has the clout to decide which FX contracts should be mandated for central clearing and reporting.
Patrick Pearson, who heads up the EC unit that drafted EMIR, has publicly announced he favors that forex swaps and forwards be exempt from central clearing. He has also cautioned against regulators adopting divergent collateral requirements for transactions not cleared through a central clearinghouse which could raise the margins to prohibitively high levels.
Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com)