A wave of new and amended regulations was inevitable following the post-2008 financial crises and set in stone during the 2009 G20 Pittsburgh Summit, where world leaders set out the path to financial transparency, consistency and fairness - always key goals of global markets - through measures such as central clearing and trade reporting. In Europe the headline regulation was the European Market Infrastructure Regulation (EMIR) which has set about introducing clearing and reporting to European derivatives markets, alongside other regulations effecting settlement and fund management.
There have been many complaints, both public and private, about the extent to which regulation has run. Is central clearing the silver bullet to future financial meltdown? Are capital requirements under Basel III too stringent? Does there need to be competition in the central securities depository (CSD) space, the CCP space and the trade repository space? Finally, are all of the regulatory measures complementing one another, or are they in fact competing? Competition has been a tool widely utilised by the European regulator, although the impact of that remains somewhat uncertain.
“There are a number of examples where post-trade harmonisation was not achieved in Europe,” said Fabrizio Planta, team leader of the Post-Trading Markets Division at the European Securities and Markets Authority (ESMA) at the recent AFME European post-trade conference. “Prescriptive regulation is a result of the industry’s failings in the past 15 years.”
This point of view is supported in the way ESMA, the regulatory arm of the European Commission, has set about implementing regulation in Europe. A harmonised, competitive landscape has been a key objective in Europe ever since the 1957 signing of the Treaty of Rome which sought to eliminate barriers which divide Europe, expand balanced trade and fair competition, strengthen the unity of European economies and contribute to the progressive abolition of restrictions on international trade. A single currency, a single payment system, a capital markets union; competition and consolidation have been the backbone of this vision.
Target2-Securities (T2S) will introduce a single settlement system, alongside the introduction of CSDR, which will foment consolidation in the CSD landscape. It does not require too much of a leap of imagination to envisage a Target2-Clearing further down the line.
“EMIR and CSDR are directly applicable regulations and ESMA is involved to ensure their consistent application and implementation across Europe,” said Planta. “With CCPs there is a large degree of harmonisation because of the colleges (colleges of regulators) that preside over their authorisation. We have had to be prescriptive to ensure this consistency.” Forced harmonisation, if you will.
Some within the industry have seen the regulatory approach in Europe to be somewhat overzealous. Some overseas, notably the CFTC in the US, have been of a similar disposition. “It is important regulation is a success for the EC – there will be no move back to a system of directives,” asserted Planta. “The creation of ESMA has been another success in Europe. The use of colleges has been an important tool in ensuring harmonisation across CCPs.
“Trade reporting has been a big success, with one authority defining and enforcing the rules. There is one level playing field. Great work has been done.”
There will be no softening of ESMA’s disposition. It is standing its ground in regards to global harmonisation of clearing rules, having so far failed to find an equivalent framework with its US counterparts.
The regulator has also taken a firm stance on asset segregation, much to the chagrin of some market infrastructures. Whilst full asset segregation can be argued to be the safest model, it is also costly. “Our key objective is investor protection, then efficiency,” argued Planta. “We need to be as strict with market infrastructure as we are with investors. We need infrastructure to be trustworthy. If segregation is not the answer, what is?
“We all agree on the objective, but not on how to achieve it.”
And therein lies the regulators lot. There is a clear objective, but no clear route to achieving it. The prescriptive route was the only one available to ESMA, a body that contains a headcount of little over 100 to enforce the most sweeping regulatory changes of this or any other generation. It has not always been popular but it has, so far, been effective; at least in terms of the fact that the regulations are here and transposed. The objective remains clear; the route and the results do not.