BERLIN Implementing new European Union rules to reduce risks in the $640 trillion (428.5 trillion pounds) derivatives business could stretch into next year, because the regulation needs to be phased in gradually, a senior EU regulator said on Monday.
"It is a phasing-in and this is only logical, because it is such an enormous change to the whole sector," European Securities and Markets Authority (ESMA) Chairman Steven Maijoor told Reuters in an interview.
After the financial crisis, the European Union, United States and other G20 economies have been trying to devise new regulation to improve transparency and safety in derivatives, which include instruments such as interest rate swaps. These are traded privately between investment banks and other finance firms rather than on exchanges.
The new rules aim to ensure that derivative trades are properly recorded, traded on electronic platforms and backed by a central clearing house with the resources to step in if there were a default.
Maijoor said the first phase of implementation in the EU would be to register the central counterparties (or clearing houses) and assess whether they met the new requirements.
"Then, in the fall of this year, we will decide which kind of products have to be centrally cleared and which can continue to be bilaterally cleared. This will easily continue into 2014," Maijoor said.
He said regulators from Europe and the United States were trying to minimise cross-border clashes from their new regulation but that some differences would remain.
"We are trying to align as much as possible to avoid regulatory competition, regulatory gaps," Maijoor said. But he said the U.S. rules under the Dodd Frank Act were very different from Europe's. And he noted there was little progress made on the cross-border reach of some of the new U.S. rules.
"We are trying to convince the Americans to say, once the systems are broadly equivalent to each other, let's rely on each other instead of doubling up," he said. "This is still a difficult issue, there is some good progress, but there is still a gap."
Under the U.S. Dodd Frank Act, foreign banks and firms who want to transact derivatives with American counterparties will also have to comply with U.S. trading and clearing rules. The U.S. derivatives rules are being phased in from this week.
Maijoor said the central clearing counterparties would become much larger institutions and there would be new ones trying to get into this market. "It will be a very European market," Maijoor said.
The EU and the United States account for the bulk of derivative trading. Asia is watching how they will mesh new rules together to avoid fragmenting a global market.
On the issue of interest rate benchmarks, Maijoor said the EU was right to force banks to stay on panels that set benchmark interest rates such as Euribor to ensure their validity, as envisaged in a draft EU law.
"There are still many contracts outstanding that are based on daily establishment of the Euribor. We think there would be stability risks if Euribor were not to be established anymore on a daily basis," Maijoor said.
More than a dozen banks are being investigated by regulators over the manipulation of Euribor and Libor, the inter-bank lending rates used to price trillions of dollars of loans.
The rate-rigging scandal and uncertainty over how benchmarks will be regulated have prompted some banks to pull out of the panel that helps set Euribor.
Regulators fear smaller contributor panels make benchmark rates less viable and easier to manipulate.
"I would hope, and my current assessment is, that a sufficient number of banks understand that obligation and will continue with it," Maijoor said. "If you start a certain product and the going gets tough, that shouldn't be a reason to say let's get out of it."
It was down to EU legislators, not the regulator, to decide how such benchmarks should be regulated and supervised in future.
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