The Futures and Options Association and the FOA European Industry Council have responded jointly to the European Commission's Public Consultation on Derivatives and Market Infrastructures, commending the Commission for its general approach to date, including the degree of industry consultation.
More specifically, the FOA and EIC very much support the intention to exempt non-financial end-users from some of the more onerous clearing obligations and to facilitate the continuance of customer choice by not impairing the availability of bilaterally-cleared "bespoke" OTC contracts. The associated capital requirements should not, however, be so disproportionate as to render their use uneconomic for risk management purposes. This calls for a regulatory framework which is effective, proportionate, deliverable and closely correlated with IOSCO's recommendations.
The FOA and EIC do have a number of specific concerns:
One is the Commission's view that, because the authorisation and supervision of CCPs is a "political choice", there is no need for public consultation on who regulates them. "The decision not to consult with stakeholders in the clearing process on who should be responsible for regulating that process and its providers runs entirely against the Principles of Good Regulation," said Anthony Belchambers, FOA Chief Executive. "In particular, we question the ability of the Commission to take 'informed decisions on these markets' without consulting the stakeholders who will be directly affected by that decision."
Secondly, the FOA and EIC are concerned that the Commission's desire to avoid a segmented policy approach to different asset classes in the OTC derivatives market conflicts with their earlier recognition of the need to accommodate market differentiation, particularly in relation to certain commodity markets such as electricity and gas. An unduly standardised approach could distort market functionality and impair the provision of essential dealing and risk-management services for end-users. The FOA and EIC would urge the Commission to deliver on its recognition of market differentiation.
Thirdly, any mandating of interoperability between CCPs should be looked at carefully to ensure that its advantages are not outweighed by undue exacerbation in risk. The FOA and EIC suggest that this may be an issue that would be better addressed outside this proposed legislation.
Steve Sparke, Chairman of the FOA and EIC and COO of Marex Financial, said:
"Sustaining the economics that underpin risk-management capability and practice is critical. The Commission's express assurances that it will conduct market impact analysis before implementing its policy decisions have a key part in maintaining a proper balance between establishing safer markets, but also markets that continue to make economic sense for end-users."