The Real Impact of Derivatives Regulation: Time to Challenge ESMA with the Realities?

by Richard Raeburn, EACT Chairman. ESMA invited comments on the technical standards for reporting under article 9 of EMIR. I sense that amongst corporate practitioners there is a profound sense of weariness - a weariness borne not just out of the volume of work created for them but also the sheer frustration of dealing with the uncertainties and inconsistencies that dog the implementation of at least the trade reporting aspects of EMIR. That volume of work is incidentally (and in my view) contributing neither to the greater good of treasurers, their employing organisations nor I suspect regulators. But the EACT does not allow itself to become weary and in our response to ESMA we make two fundamental points: that there should be sufficient lead time to implement future changes in reporting requirements; and that reporting should be focused on areas of increased inherent risk and exclude transactions that are not systemically risky. On the first point we highlight the problems caused by the rule changes and adaptations that are still being made. We argue for a stop to future large scale reporting changes, for proper time to allow trade repositories to test enhancements etc. We also stress that new reporting requirements should apply only to new transactions and not to those previously reported but not reconciled. For the second point we return to the core issue of the need for an EU wide exemption of intragroup transactions and for clarification of the scope of an FX derivative to exclude FX contracts used for commercial/hedging purposes by corporates. The elephant in the room here is of course the question as to whether the panoply of derivatives regulation as applied to corporates (ESMA's non-financial counterparties) is actually contributing to a reduction in systemic risk linked to the financial sector. Since the beginning of the regulatory tsunami in 2009 I have argued that the proposals for derivatives were fundamentally misguided to the extent that civil servants, politicians and regulators believed that the corporate sector is a real source of systemic risk. All of which brings us to EMIR v2. I'm sure there will eventually be an EMIR v2 even though it is already behind schedule. The EACT's shopping list will include the exclusion of intragroup transactions, a switch to one-sided reporting and above all a better coordinated and consistent global approach. One can only dream.