Master and Commander

Type the word ‘emir' into Google today, and you'll bring up a host of articles related to the European Market Infrastructure Regulation (Emir). But that wasn't the case even a few months ago, when the dictionary entry for the word appeared first, and financial regulation far down the list.

The word ‘emir', after all, has a lengthy history. In Islamic spheres, it means an independent ruler, a military commander, or a descendent of Muhammad, peace be upon him. It can denote political rank in some countries, such as Qatar or Turkey.

In European finance, of course, it represents a large-scale reform of derivatives trading on the continent, being part of the multi-pronged approach to overhauling the securities markets here. The reporting requirements that had caused such consternation in the buildup came into force last week, but despite a few hiccups, it seems to have gone okay.

Building Blocks
The problems with Emir are fairly typical of the problems with regulatory reform over the past few years, in that they have been rushed through without a proper appreciation of the consequences and the necessary moving parts needed to keep the engine running. With Emir, for instance, the amount of confusion over necessary aspects such as the pre-legal entity identifier and the unique trade identifier (UTI) has been quite remarkable.

Despite being a necessary component for reporting, it's become clear that not everyone who needs to has registered for these identifiers, that the pace of issuance is lackluster in places, and when it comes to the UTI, there is no central governing standard, and people aren't sure what form it should take.

If a regulator has to say that, essentially, it won't enforce the regulation because it recognizes the impossibility of full compliance in the short term, that regulation should not be implemented yet.

The UK's Financial Conduct Authority has said that it will give firms a grace period for proper reporting, but the whole situation is, frankly, unacceptable. I'm not arguing against the regulation itself ─ indeed, I've long been of the opinion that more transparency, and a shift to technologically capable markets can only be a good thing. But that has to be tempered with realism. If a regulator has to say that, essentially, it won't enforce the regulation because it recognizes the impossibility of full compliance in the short term, that regulation should not be implemented yet.

No Action
You see this in the US all of the time, where bodies such as the US Commodity Futures Trading Commission issue no-action letters to say they will not be prosecuting firms for non-compliance. Granted, this is partly due to the legal structure of regulation in the US, where the law is made first and the rules after, as opposed to Europe, where the rules are made first and then come into law. But for such far-ranging regulations as the Dodd-Frank Act, Emir and the Markets in Financial Instruments Directive, there has to be concern that these are being rushed through without the due care and attention that is required.

It's important to progress in the regulatory process, of course, but doing so with what is blind disregard for the foundations not even being in place yet, or being slotted in for compliance dates, is foolhardy. It will lead to loopholes, arbitrage, and broken rules that ruin the opportunity of a generation to adapt the market framework to the market environment, taking into account the use of technology and the way in which it has changed how business is conducted.

And at the risk of putting the boot in too much on the regulatory side, let's not forget the woeful lack of preparation from some corners of the industry, either. More effort and engagement is needed on both sides.