Esma must mirror US Treasury’s FX exemption, says EC official

The European Securities and Markets Authority (Esma) should replicate the US Treasury's proposed exemption of foreign exchange swaps and forwards from mandatory central clearing, despite an apparent difference of opinion between the US and Europe over the treatment of uncleared trades, according to a European Commission (EC) official and architect of the European Market Infrastructure Regulation (Emir).

Speaking at the Risk Annual Summit in London last week, Patrick Pearson, head of the EC's financial markets infrastructure unit, said Esma would need "pretty good arguments" not to follow a similar approach once it has consulted with the US authorities on the technical standards for Emir.

"If you look at the text of the regulation, it's pretty clear where we need to end up - it's clear Esma needs to consult with third-country regulators. There are things you fight for and things you don't fight for, and it doesn't make a great deal of sense, if the US exempts foreign exchange from central clearing, for the European Union to introduce mandatory clearing," said Pearson.

Pearson also tackled the thorny issue of collateral requirements for trades not cleared through a central counterparty (CCP), which could potentially see forex swaps and forwards subjected to punitive margin rules, in spite of the likely clearing exemption. The issue is being analysed by an international working group drawn from four standard-setting bodies, but Pearson warned of a dangerous difference of opinion between European and US regulators.

"If Europe and the US come up with different rules on margining requirements, this will be like sitting in a hot tub with a bar of soap - the harder one of the two jurisdictions tries to regulate that area, the quicker the bar of soap will slip from your hands. That is why one of the absolute priorities at the international level is to get agreement on common rules on who collects margins, who posts margins, and how we set those margins," said Pearson.

Other speakers also acknowledged the unexpected complexities of the mandated move to central clearing for over-the-counter derivatives, with Andrew Sterry, Citi's European head of derivatives intermediation and clearing, expressing surprise at the low volume of clearing that has been achieved so far.

"If you had asked me, when I first started this job in 2009, if we'd be in 2012 and still only have a small percentage of the market clearing, I would have laughed, but unfortunately that is the truth. There are still a lot of accounts that have to be live for mandatory clearing in 2013, and a lot of work that has to be done to get there," said Sterry.

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