EU no-action, double capital and Nasdaq loss

Europe inches closer to own version of no-action relief

Five options on the table, lawmakers want case-by-case veto, firms push for power over primary laws

EU seeks fix for capital double-count

Rules for investment firms would pile capital on capital in apparent error

After Nasdaq, cracks appear in foundation of clearing

Default fund loss triggers debate on risk sharing, auction rules and ‘skin in the game’ at CCPs

COMMENTARY: Disaster relief

Unlike their US colleagues, European Union financial markets regulators lack a defined tool to suspend the enforcement of rules that would harm a market. But that could be about to change.

It is a long time coming. Ad hoc reprieves granted by European supervisors, such as postponing the margining regime for foreign exchange forwards, have backfired by creating more uncertainty.

In a speech in February 2017, Steven Maijoor, chair of the European Securities and Markets Authority, called for “an instrument similar to the [US] no-action letters” that would allow the rapid termination of a clearing or trading requirement when changing technical standards would take too long.

But while the bloc’s lawmakers in the Council of the European Union and the European Parliament have put forward a number of proposals for a no-action tool, at the moment it is not clear if they can agree on a single approach and, even then, the European Commission would need to back the idea.

Elsewhere, EU lawmakers are being urged to reconsider draft prudential rules for investment firms.

If the Investment Firms Regulation is adopted as currently drafted, investment firms would have to deduct the capital of non-EU subsidiaries from their own funds at group level, and then hold group own funds to cover the non-EU capital they had just deducted. A fix is being recommended to remove this apparent oversight, as it could produce a doubling of capital.

Proprietary traders are expressing growing unease that EU prudential rules could end up being applied to their operations in the US and Asia, plus the UK after Brexit, leaving them with higher capital than their foreign rivals. The combination of the investment firms regime and a harder line on third-country access could then oblige UK principal trading groups to consider more extensive Brexit relocations of their operations to the EU27.

STAT OF THE WEEK

Alternative risk premia funds have suffered a dismal year, returning losses of nearly 5% on average. Some, though are doing worse than others. A 14 percentage point gap has opened up in returns and a 10% gap in volatility between different funds.

QUOTE OF THE WEEK

“If a CCP takes on a lot of risk, it opens itself up to the accusation that it is driven by commercial considerations” – Head of derivatives at a central counterparty on the €114 million loss at Nasdaq