Industry doubts pausing the EU reg machine will offer relief

Market participants are sceptical that a proposal to halt certain rulemaking will reduce compliance costs or boost growth

Key points Summary Q&A

• The European Union is considering delaying a roster of secondary regulation to reduce compliance costs, ease industry burdens and increase competitiveness with other jurisdictions.
• But industry experts doubt the postponements will lead to significant long-term benefits for market participants.
• The regulations in question cover various financial services, including bank capital and trade reporting rules.
• Now there are calls for more fundamental changes to the EU’s rulemaking process to enhance competitiveness and reduce regulatory complexity.

These summaries are generated by an LLM, but edited by humans.

After years of churning out regulation, the European Union has been reflecting on the impact of its prolific rulemaking. Now – in a bid to slow its conveyor belt of rules – it is contemplating postponing a slew of secondary regulation.

At the same time, rising geopolitical tensions have highlighted the need for a thriving economy in Europe, and mounting compliance costs from an ever-growing slate of rules could hinder this objective. It’s clear something needs to change – but industry sources don’t believe the answer lies in the initiative to postpone 122 of the bloc’s delegated acts.

Prepared by the European Commission (EC) and distributed among members of the Council of the EU, the initiative was laid out in a leaked document – a ‘non-paper’ – seen by Risk.net.

Three sources say they doubt delaying these measures will significantly cut costs for market participants.

“I don’t think there’s anything in there that will be materially beneficial in the long term,” says David Zahari, senior director of European public policy at the International Swaps and Derivatives Association.

The 122 acts in question relate to various financial services rules, including those governing bank and insurance capital requirements, the structure of capital markets, trade reporting, clearing and sustainability. While there’s no final decision on the exact number of acts affected, each one listed has been labelled to indicate that the EC either “shall delay” or “may delay” it.

The acts include legislation that would provide end-users of clearing services with margin simulations, along with an act that specifies reference data to be reported under the Markets in Financial Instruments Regulation (Mifir), as well as acts on collateral exchange for equity options and buy-ins for settlement procedures.

Also known as Level 2 measures, secondary legislation fleshes out the high-level requirements written in Level 1 legislative texts agreed by the EC, the Council of the EU, and the European Parliament.

As it seeks to trim down compliance costs for the industry, the commission’s hope is that postponing the delegated acts could reduce the current burden on the industry and on regulators – thereby aiding the region’s ability to compete in the global marketplace.

But among those doubting that a delay to this ragbag of regulations will translate to lower compliance costs or enhanced competition, there are some who say it could even be detrimental. And that while some delays could lead to cost reductions by avoiding implementing rule changes, others would only cause minor changes to firms’ obligations. The list also includes acts that are optional or dependent on events that haven’t yet occurred.

Two sources say more sweeping changes are needed to the way the EU develops rules in the future. 

“As a general point, there is a case that in EU legislation, we delegate too many decisions on delegated acts, guidelines and Q&As,” says Markus Ferber, a member of the European Parliament. “Often those delegated acts or other pieces of implementing legislation introduce undue complexity. So, there is good reason to look into this in general.”

It’s not the intention, but the main burden reduction would be for regulators

Roger Cogan, Isda

There are also initiatives underway that could help increase economic expansion. But some say more needs to be done. Many in the industry argue regulators and legislators need to make growth their priority; to promote this objective, they argue the EC’s three technocratic helpers – the  European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational Pensions Authority, collectively, the European Supervisory Authorities – need a competitiveness mandate cemented into their overarching objectives.

“I hope for more profound changes in the way we draft rules,” says Quentin van Lidth, a director of regulatory and public affairs for global markets at BNP Paribas. “We need to put in that second objective of competitiveness as a start.”

Jurisdictional Jenga 

In a global economy that has become increasingly adversarial, growth in the bloc has been slow and American companies dominate many industries.

An influential report written by Mario Draghi, the former governor of the European Central Bank, published in September last year, lays the blame partly on the regulatory burdens the EU creates for its industries. These often favour large conglomerates able to shoulder the costs and incentivise European companies to remain small to avoid them.

Part of the problem is the way rules in the EU are developed. Three different levels of rulemaking can result in layering of regulations, when new requirements are introduced in Level 2 regulation as a result of fleshing out requirements in Level 1. Similarly, the freedom to interpret how a rule works in Level 1 can become more restrictive in Level 2.

The third level relates to guidance provided by the ESAs on how a Level 1 or 2 rule works. This guidance is never, in theory, legally binding, points out BNP Paribas’s van Lidth, but participants must always take it into account.

“It always comes from a good intention,” he says. “Somebody asks a question on how to interpret a rule, and then Esma talks to all national competent authorities, and they say, ‘we feel this is the right thing to do’. But this can come with big side-effects and generally adds to regulatory complexity. You must have experts to understand every single verb.”

But the EU rulemaking process can also benefit participants by providing more certainty around interpretation of rules, which can reduce the chances of a supervisor finding a market participant’s interpretation of a rule – and thus their implementation – being wrong.

“Many clients in the area of regulatory law are not violently opposed to having clear guidance around some of the questions,” says Marius Rätz, counsel at law firm Linklaters. “So, saying that reducing Level 2 guidance automatically reduces regulatory burden, I think, in its simplicity it is not correct.”

The way EU legislation is drafted may also suit the system for which it is designed. Having 27 different regulators can lead to 27 different interpretations.

“You’ve got to think about it as a Jenga tower.  You need the clarity or detail provided in this delegated regulation in order to have supervisory convergence – in order to have the level of detail that you require to know what’s expected of you,” says one industry source. “Remove a piece of the puzzle, and suddenly either you end up with divergent practices or missing information that won’t necessarily result in efficiencies and cost savings.”

The European Parliament’s Ferber points out that many of the delegated acts on the potential pause list were not among those made optional by the Council and Parliament. For those that aren’t, he says the EC now has to provide a “strong case” – which is also “legally sound” – for not adopting them.

A numbers game

Equally, listing some optional mandates as needing delay strikes some in the industry as odd because the EC and its three ESA helpers didn’t need to draft them in the first place – and it’s not clear whether there was any intention to draft acts for these items.

Empowering the EC to draft rules revoking an exemption held in the bloc’s European Market Infrastructure Regulation (Emir) for single-stock and equity index options is a case in point. EU traders aren’t required by Emir to exchange regulatory-determined collateral on non-cleared versions of the products, since US traders are likewise not required to do so.

EU legislators had originally provided a time-limited exemption that they repeatedly extended, the longer the US did nothing to scope in the products. In November 2024, EU legislators made the exemption permanent and gave the EC the power to revoke the exemption if the US ever subjected the products to the rules – which it has not done to date.

“It would have been perplexing if it went ahead, given it’s only in the relatively recent past that the equity options exemption has been made permanent,” says Isda’s Zahari.

Currently, Esma functions as a factory developing rules... That’s in part at least a reason why some of these regulatory technical standards are being stopped, because it’s overburdening – not just the industry, but the whole regulatory production machinery

Industry source

Similarly, the list contains a delay to an act mandating a buy-in procedure for trades in securities that fail to settle. The rule, which requires the appointment of an agent to sell the securities the buying firm hasn’t yet received, has been controversial. Rather than pushing ahead with the procedure as intended, the EU instead gave the EC powers to switch it on, should a new penalty regime designed to discourage settlement fails prove ineffective. In a report published in February this year, Esma states settlement failure rates decreased in the second half of 2024, which stretches a downward trend in rates observed since the start of the penalty regime in 2022.

Both acts would increase the burden on the industry, but it’s not clear whether the EC would have passed them anyway. A prudential regulatory expert at an EU bank says it remains to be seen whether the large list up for delay was meant to make the EC “look good” by seeming to cut a large number of acts.

Breaking good?

Overall, sources believe it’s the rulemakers who will receive the most significant relief from a delay to their empowerments.

Roger Cogan, head of European public policy at Isda, says, “It’s not the intention, but the main burden reduction would be for regulators.”

“Currently, Esma functions mainly as a factory developing rules,” says the first industry source. “They’ve also been overburdened with doing that. That’s in part at least a reason why some of these regulatory technical standards are being stopped, because it’s overburdening – not just the industry, but the whole regulatory production machinery.”

Pausing multiple delegate acts will offer EC staff some respite from scrutinising the sheer quantity of work coming from the EBA, Esma and Eiopa. The delay could also give the three ESAs an escape from a building bottleneck.

Does delaying the acts in question benefit the industry? A regulatory expert at a trading venue points to one delegated act that revises the criteria setting out the relative importance of different factors when assessing the best outcome for a client – and says that in reality, the revision is unlikely to affect a firm’s best execution obligation.

Other delegated acts on the list would offer the industry some relief if delayed, however. They include a requirement – currently being drafted by Esma – to provide end-users of clearing services with simulations of how much margin they might have to pay in stress events. Released on June 24, Esma’s proposals suggest central counterparty clearing members provide their clients with a range of simulations. But clearing banks have questioned whether the costs they would bear under the proposals had been fully taken into account.

Also among the acts that would provide some relief are Mifir’s transaction reporting rules, which require market participants and trading venues to submit lists of their trades executed over the course of a day to data infrastructure providers, which then make the lists available to regulators. These lists include instruments available for trading on EU venues or with an underlying asset that is available to trade on a venue.

The EC was empowered to adopt a delegated act specifying the reference data firms would need to submit to identify distinct over-the-counter derivatives within Mifir transaction reporting.

Delaying the delegated act will mean any changes can be coherently made along with a separate initiative to revamp reporting rules. On June 23, Esma issued a call for evidence on ways to streamline multiple different reporting regimes.

“On the face of it, a delay is detrimental because you would hope it would address, for example, the rolling ISIN issue,” says Isda’s Zahari, referring to the International Securities Identification Number, the code used to distinguish between different OTC derivatives. “But with the call for evidence, it has become important changes aren’t made in isolation.”

I think we have a different tone now in the EU, but obviously this will filter through, and it will take time. I don’t think it’s necessarily the right perspective to bash EBA and Esma for what they’re doing

Marius Rätz, Linklaters

Meanwhile, Esma has also announced a delay to a revision of the fields reported as part of Mifir transaction reporting, which wasn’t on the EC’s list to delay. The draft proposals published for consultation in October last year would have increased the number of reportable fields, which many felt went contrary to the EU’s ambition to reduce reporting burdens.

“We wholeheartedly welcome that they’re pausing that review of RTS 22 and looking in a more holistic way at all the transaction reporting,” says BNP Paribas’s van Lidth. He says the draft revisions of the reportable fields was “substantial”.

“It was doing the opposite of what they were supposed to be doing.”

The initiative to reduce reporting burdens shows more promise of reducing compliance costs. Esma’s call for evidence seeks to streamline Mifir’s transaction reporting with two separate obligations for firms to report individual trades in derivatives and securities financing transactions to data repositories, which make the information available to regulators; the reporting obligations are held in Emir and the Securities Financing Transactions Regulation, respectively.

Esma presents a list of options to cut down the number of reports the industry makes. In each of the options, Esma suggests only one counterparty need report under Emir and SFTR rather than both, as is currently the case. Further ways to cut back on the number of reports include either delineating each reporting obligation for different reporting instances, such as by instrument type, or expanding Mifir transaction reporting to incorporate all information included in other obligations.

“We were shocked – but in a very pleasant way – to see the call for evidence that came out,” says Isda’s Zahari. “We believe this offers a massive opportunity for burden reduction.”

New objectives

Sources do see a need for Europe to change its rulemaking process to avoid creating a labyrinth of regulation with paths that are too taxing for the industry to navigate.

The European Parliament’s Ferber points to the EC as “often” being a culprit of delegating tasks from the primary legislation, but it isn’t the only one deciding these empowerments. Council and Parliament sometimes create these mandates as a way to sidestep disagreements. Linklaters’ Rätz says the EC can most effectively address the problem as it can set the tone from the top for other institutions to follow.

“I think we have a different tone now in the EU, but obviously this will filter through, and it will take time,” he says. “I don’t think it’s necessarily the right perspective to bash EBA and Esma for what they’re doing,” he adds.  “I think it would be equally [on] the commission, from the top, to reduce that [burden].”

Change is already becoming evident among the ESAs, which are looking for ways to alleviate the impact of delegated acts. The industry, however, is pushing for a promise of more permanent changes to the laboriousness of rules they issue.

Legislators should also refrain from inserting review clauses into primary legislation, says a report published by EU industry groups in April this year, to ensure more enduring stability in rules.

Multiple industry groups are also calling for an objective to be inserted into the ESAs’ founding legislation, requiring them to contribute towards making EU financial markets more competitive internationally. UK legislators undertook a similar move in the wake of its departure from the EU. Although the move wouldn’t affect the flow of rules coming from the ESAs, the hope among market participants is for the ESAs to be more considerate of the costs on the industry from future rules.

Nonetheless, Esma stated in a position paper published in May last year that it doesn’t see a need for an explicit mandate. Currently, the legislation that is Esma’s foundation lists several objectives, such as improving the functioning of the internal market and enhancing supervisory convergence. Its preamble, however, states the authority should take into account the impact on the EU’s global competitiveness from its activities. The same imperative is also held in the EBA and Eiopa’s founding regulations.

Right now, the sense of urgency to improve the EU market’s competitiveness is clear among its legislative institutions. But meaningful improvements may need more to sustain them.

Editing by Louise Marshall