LONDON (Reuters) - A delay in European Union rules making derivative financial instruments safer would tie the bloc’s hands in talks with the United States to unify the way the industry is regulated, a top supervisor said on Wednesday.
The European Parliament’s economic affairs committee rejected a final version of the rules on Monday evening, saying they would penalise firms that use derivatives to insure against the risk of adverse price movements in raw materials.
If parliament backs the committee on Thursday in full session, the European Securities and Markets Authority (ESMA) will have to redraft the rules, causing a delay.
Gerard Rameix, chairman of French markets regulator AMF, said it was crucial the rules were approved as soon as possible.
“If the rules are delayed it could have consequences for the industry and for relations between the EU and the United States,” he told Reuters.
“Members of the European Parliament have now to decide if the concerns raised by their committee are serious enough to take the risk to postpone the decision.”
The EU, United States and other G20 economies agreed during the financial crisis that the derivative market’s $640 trillion (408.53 trillion pounds) of trades should be recorded to improve transparency and safety.
The EU and 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.
“The United States is now ready to enforce the new principles and we are trying to negotiate with them so that European players don’t have to follow two sets of rules,” Rameix said.
“If in Europe we have not adopted yet our rules when we are discussing the matter with the United States then we are not in a favourable position.”
EU and U.S. regulators meet in Brussels on Wednesday to try to minimise transatlantic overlaps after a meeting in New York late last year failed to reach a deal.
The AMF sat on ESMA’s working group which wrote the EU rules and Rameix said U.S. regulators signalled last week at a meeting he attended in Zurich that America was “open to discussion”.
“They said they were ready to rely to a certain degree on a company’s home rules but that they have to know what exactly are our rules,” Rameix said.
Under the U.S. Dodd Frank Act, foreign banks and firms who want to transact derivatives with American counterparties will have to comply with U.S. trading and clearing rules.
European banks have been given a six-month grace period until July and the hope is for a transatlantic deal by then.
If the regulators fail to make headway this week on recognising each other’s rules, they may have to ask G20 finance ministers meeting later this month in Russia, to intervene.
EU financial services commissioner Michel Barnier meets with U.S. regulators this month, and last week hinted at retaliatory action if no agreement is reached on recognising each other’s rules as being “equivalent” and avoid costly overlaps.
The collapse of Lehman Brothers in 2008 highlighted how opacity in derivatives created huge market uncertainties.
Trading is dominated by the big banks like Goldman Sachs, Morgan Stanley, Deutsche Bank and HSBC who earn handsome fees from devising bespoke derivatives.
The reforms will reshape a global market as some participants think twice about trading because of the larger amounts of capital and collateral required.
“Mandatory clearing of OTC derivatives is really a revolution. No one knows the precise consequences on the size of the OTC market of the obligation to clear a significant part of these transactions,” Rameix said.
“The OTC market is likely to diminish and it would be much healthier for the market.”
Editing by Tom Pfeiffer