Don't Worry Guys, We've Got This

Normally, I like a good regulatory announcement, even if I suspect that by the time I reach middle life I'll be having recurrent nightmares about PDFs that stretch into the triple figures. Some press releases, though, are so saccharine they have you reaching for a lemon in minutes.

"Our discussions have been long and sometimes difficult, but they have always been close, continuous and collaborative talks between partners and friends," said Michel Barnier, European Commissioner for Internal Market and Services, in a press release issued by the US Commodity Futures Trading Commission (CFTC) last week, regarding an agreement on the way in which cross-border derivatives transactions will operate.

Aww.

Lengthy Wait
No, really, it's good that the US and EU have agreed in principle. The application of rules in a cross-border operational sense has long been a sticking point when it comes to derivatives reform. Thinly (and fairly weakly), equities can be seen as a domestic business to a certain extent, insofar as they trade on a listed basis, on an exchange that has a capital city's name on it. Derivatives are more international, and thus, you get regulatory conflict when you have a US person transacting with a European counterparty. Jurisdictional nightmares, you see.

This is a pretty severe problem in Asia at the moment, where CFTC rules over the reporting of counterparty names in a transaction, without which you can't have an enormous degree of transparency, are disallowed by local conventions in countries such as China and Singapore. The no-action letter provides some relief in this regard, and stops US shops from having to cease trading there altogether, but it's a patch rather than a cure.

With an increasingly electronic basis for derivatives trading, globalization soon follows. That means there will have to be increased attention paid to markets outside of the US-EU duopoly.

What the Super Friends Club doesn't seem to be hugely cognizant of is the lengthy wait and stress that the industry has had to endure for this agreement. Which, essentially, says "hey just use the EU's rules because they're kind of the same". I'm not talking about a little bit of stress either, I'm talking about questions around whether businesses will have to withdraw from some markets and make thousands of people redundant as a result. Serious stuff.

Data and Disparate Denizens
There's not much on trade reporting though, which needs some form of standardization and convergence to a common framework, and there are some issues around data protection which probably need to be addressed.

Likewise, with an increasingly electronic basis for derivatives trading, globalization soon follows. That means there will have to be increased attention paid to markets outside of the US-EU duopoly. As we've seen in Asia-Pacific though, with the jurisdictional problems there due to regional fragmentation and central clearing, that's easier said than done. But not less crucial. While substituted compliance agreements are allowed for Hong Kong and Australia after Friday's wider cross-border announcement, for instance, there's no mention of Singapore.

Still, a harmonized framework is what's been lobbied for, what is probably the most sensible option, and what will likely ensure more of an orderly market in conjunction with everything else going on in derivatives while remaining practical for banks to comply with it.

There is, however, a lingering feeling that this probably could have been agreed over a cup of coffee and a handshake quite a while ago.

C'est la vie, at least ESMA's on the case.