Derivatives reform under the spotlight

[FaGal]

Derivatives reform under the spotlight
news.ft.com - By Jeremy Grant in Chicago - March 10, 2005



The Futures and Options Association has launched a campaign on both sides of the Atlantic to influence talks between European and US derivatives industry regulators over smoothing differences between their regulatory regimes.

It has sent letters to member firms seeking their views on what they see as “priority areas” for regulatory simplification.

The development reflects the desire by the FOA that any reform of the European and US derivatives landscape takes into account the priorities of market participants rather than being driven solely by regulators.

Anthony Belchambers, FOA chief executive, said: “We want to be able to say to the regulators: we have a commercial input on that.”

The development comes as the Commodity Futures Trading Commission and the Committee of European Securities Regulators have stepped up dialogue over eliminating regulatory barriers to transatlantic trading at a time of record cross-border derivatives activity.

The FOA, the UK-based industry association for banks, brokers and fund managers active in derivatives trading, wanted the industry to “develop its own agenda for where there should be regulatory simplification”, Mr Belchambers told the Financial Times.

“Big institutions can’t develop a coherent internal compliance policy until there is a coherent regulatory policy environment,” he said. “Why shouldn’t we get to a stage where we can have a common set of standards?”

He singled out money-laundering and the segregation of customer and proprietary trading accounts for attention.

“Most institutions are fed up with the fact that there are different approaches to money-laundering,” Mr Belchambers said.

Such issues have come into focus with efforts by Eurex, the derivatives arm of German-Swiss-owned Deutsche Börse to implement the second phase of a “global clearing link” that would allow traders to clear US futures products at Eurex’s Frankfurt clearing house and at a US clearer.

Critics of the scheme, which is awaiting CFTC approval, argue that European rules do not allow sufficient protection for US customers’ funds lodged in Europe that might be enmeshed in bankruptcy proceedings.

The issue of smoothing regulations is complicated by the existence in the US of one agency for futures, the CFTC, and another for options and equities, the Securities and Exchange Commission. Both operate under specific US legislation passed for each agency.

Such a distinction is likely to make difficult any ironing out of regulatory kinks between the US and Europe because European regulators generally make fewer distinctions between asset classes.

Yet most large institutions want increasingly to be able to trade all asset classes electronically on a 24-hour basis, globally.

Mr Belchambers said that the bifurcated regulatory regimes in the US meant member firms had to be “realistic about what’s achievable here”.

“But there are certain rules that can be changed without cutting across the legislative overlay,” he said.