Moderator: Nick Sawyer Editor-in-chief, Risk
Stephen O'Connor Chairman of Isda and global head of OTC client clearing at Morgan Stanley
Michele Faissola Vice-chairman of Isda and global head of rates and commodities at Deutsche Bank
Eric Litvack Isda board member and chief operating officer of global equity flow at Société Générale and Investment Banking
One clearing house per asset class is the most efficient and systemic risk-reducing model – that should be the aim
Guillaume Amblard Isda board member and global head of fixed income trading at BNP Paribas
Risk: There is a lot for the International Swaps and Derivatives Association to think about over 2012 and beyond. Can you summarise some of the key priorities?
Stephen O'Connor: Isda’s mission is to promote safe and efficient markets and, to that end, there is a continual focus on matters that will improve efficiency and liquidity. While we are always focused on those kinds of improvements, 2012 is particularly important with the Group of 20 (G-20) deadlines looming, so we are very focused on working towards that, with a specific focus on systemic risk reduction through clearing, and regulatory transparency through the data repositories.
Risk: Will the end-2012 G-20 deadline be met?
Michele Faissola: There are a lot of different issues that need to be dealt with, and the amount of work that banks and clients need to do across the industry is quite extraordinary and unprecedented. I think the deadlines are very ambitious – in some cases, there will be some postponement. There has already been a postponement in the application of some of the Dodd-Frank rules. If you look at Basel III, the Markets in Financial Instruments Directive, the European Market Infrastructure Regulation (Emir), the Dodd-Frank Act and the Volcker rule, there is a bottleneck developing. Our firms and our clients have limited resources that we can throw at this, so I suspect there will be some phasing – but that doesn’t mean the industry isn’t fully committed to achieving what the G-20 has stated in principle.
Eric Litvack: Clearly, not every aspect of the legislative framework will be in place by the end of the year – it is very ambitious and we have seen how various deadlines have slipped for the delivery of rule-makings. In Europe, negotiations between the Council of the European Union and the European Parliament on Emir have taken longer than anticipated, which is putting significant pressure on the European Securities and Markets Authority (Esma) to formulate the technical standards within the time frame it has. So, it is unlikely we will have everything in place by the end of 2012. That being said, we will have a very significant amount of clearing between dealer firms and the framework for reporting to regulators. So, regardless of whether the legislative framework is finished, the key planks of the G-20 deliverables will be in place by the end of the year.
Risk: The Dodd-Frank Act in the US was finalised in July 2010, but the final version of Emir was only agreed in February – and there are still a lot of technical guidelines that need to be drawn up by Esma. Will Europe end up implementing at a much later date than the US?
Guillaume Amblard: The US is a bit ahead of Europe in terms of the legal framework, but I would expect convergence between the US and Europe in terms of implementation, probably by the end of the second quarter of 2013, at least for the first category of counterparts – in other words, interbank counterparts.
Michele Faissola: The legal and legislative frameworks of Europe and the US are profoundly different. The legislation in the US tends to be principles-based, and the regulators have a significant amount of flexibility in how to implement it. In Europe, it is much more prescriptive, so the work done at the legislative level is much deeper and, to a certain extent, more technical. It is very important when you develop new legislation in Europe to get it right, because otherwise it will take three or four years to change if there are unintended consequences. In the US, the regulators have the ability to dynamically adjust the rules if something is incorrect or not anticipated.
Risk: Originally, Esma was charged with coming up with the technical standards at the end of June, but the deadline was delayed until September. What is a realistic time frame for implementation in Europe now?
Eric Litvack: The deadline for Esma has been pushed back to September – that is still pretty ambitious, because it needs to define how clearing houses will be authorised, the operational standards they will have, the process for making a given product obligatory to clear and how the corporate exemption will be defined. They are all technical issues that are rich with consequences. My sense is Esma will try to stick to the timetable, and it has been very aggressive about the timelines. In fact, it launched its first discussion paper before the actual Emir text was published, so it is really trying to move as quickly as possible in order to meet the deadlines. They are still ambitious, though, because a lot of the things that need to be put in place are completely new.
Stephen O'Connor: It is worth pointing out that the regulators have an enormous challenge. Esma is a new agency, and it has an overwhelming task because it has to staff-up at the same time as beginning to write rules. It is a similar situation with the Commodity Futures Trading Commission and the Securities and Exchange Commission. They are not new agencies, but they are writing rules for products they haven’t regulated before. There is an enormous body of work that needs to be done, and we have been working with them, but it is going to be a hard slog.
Risk: So are you advocating that regulators should ignore the deadlines if necessary to ensure the regulations are right?
Stephen O'Connor: Regulators should be given more time where appropriate, and Isda is on record saying exactly that.
Eric Litvack: You might say ‘financial institutions would say that, wouldn’t they?’ But, at the end of the day, it is more important to get this right than to get it out on time, because there is nothing magical about December 31, 2012. This is going to shape the way the industry works for the foreseeable future – it is important we get this right.
Risk: Isn’t that a difficult position to put to the public and regulators?
Michele Faissola: We need to work on education because many of these issues are extremely technical and complex. We don’t fully understand the aggregate impact of all these initiatives – the impact to the real economy is unknown because these changes are unprecedented. We need to get this right, otherwise we are going to have a serious problem in an economic cycle that is already relatively weak. This is not just about the industry – this is about the entire credit intermediation process. This industry provides the majority of the credit to the real economy, and there will be a significant impact if we get it wrong. But it is very important to highlight that Isda and its members are absolutely committed to ensuring we have a more solid and transparent market. I believe the majority of these initiatives are in the right place. The challenge is getting the correct balance between having a safer environment and retaining the liquidity that is necessary for the market to work.