CMF: “Increasing regulation will backfire at some stage”
11 October 2019 Amsterdam
Image: Shutterstock
“Mark Twain once said: “continuous improvement is better than delayed perfection,” one speaker highlighted at this year’s Fleming Collateral Management conference when discussing approaches to preparing for regulation.
The panellist stressed that market participants must get their implementation roadmap in place for the Uncleared Margin Rules (UMR). The speaker emphasised: “You really need to roll this out, time is really short to do this.”
“Right now people are still waiting for details relating to phases five and six of UMR. The majority of proposals have had a long time to get the details right because we have been quite aware of some of the problems that our regulators propose,” the speaker added. “A lot of people are saying UMR doesn’t work.”
“These UMR requirements for phase five and six will be phased in over the next few years but it makes no sense for Europe to shoot itself in its feet [sic] by not extending equity options requirements. Flexibility is required there; it is absolutely critical.”
With UMR, different transactions may be subject to different rules, and equity options may be out of scope for some countries such as the US, while being in scope in Brazil, while temporary exclusion on them exist in the EU.
Panellists then moved onto the more pressing upcoming regulation, the Securities Financing Transactions Regulation (SFTR), which will come into force in April next year.
One speaker said: “SFTR is good in its extensions and objectives, but there are 155 fields that need to be filled in, it is difficult enough with one financial firm as there are different desks around different tables and they all come up with different numbers so how do you value the collateral? And a lot of firms have been asking ‘when’ do you value the collateral?”
However, it was also highlighted that the process of filling in the fields is going to be all going to be programmed and not done manually on an Excel spreadsheet.
“I believe, will have a big benefit long term,” the speaker responded.
Another conference delegate warned that when management clearing is introduced, everybody needs to be aware of the fact that it doesn’t remove risk from the system; it is now being concentrated in a small number of clearinghouses around the planet and the risk itself isn’t gone.
The speaker mused: “How would we wind down a clearinghouse?”
“If a clearinghouse goes down that is catastrophic for our entire industry.”
Meanwhile, one audience member who previously worked for the European Securities and Markets Authority and helped draft some of the regulations stood in to defend the UMR.
“In the financial crisis, UK taxpayers lost hundreds of billions of dollars bailing out the banks. I see these regulations as a way to make sure we do not face a similar situation like that again. I am also a fan of central counterparties and I disagree that they are mitigating risks.”
Defending the banks on this point, a separate panellist added: “The cost of the crisis is not a fault of the bank entirely, I would say that is slightly overdoing it. We have to help each other but I think increasing regulation will backfire at some stage.”
The panellist stressed that market participants must get their implementation roadmap in place for the Uncleared Margin Rules (UMR). The speaker emphasised: “You really need to roll this out, time is really short to do this.”
“Right now people are still waiting for details relating to phases five and six of UMR. The majority of proposals have had a long time to get the details right because we have been quite aware of some of the problems that our regulators propose,” the speaker added. “A lot of people are saying UMR doesn’t work.”
“These UMR requirements for phase five and six will be phased in over the next few years but it makes no sense for Europe to shoot itself in its feet [sic] by not extending equity options requirements. Flexibility is required there; it is absolutely critical.”
With UMR, different transactions may be subject to different rules, and equity options may be out of scope for some countries such as the US, while being in scope in Brazil, while temporary exclusion on them exist in the EU.
Panellists then moved onto the more pressing upcoming regulation, the Securities Financing Transactions Regulation (SFTR), which will come into force in April next year.
One speaker said: “SFTR is good in its extensions and objectives, but there are 155 fields that need to be filled in, it is difficult enough with one financial firm as there are different desks around different tables and they all come up with different numbers so how do you value the collateral? And a lot of firms have been asking ‘when’ do you value the collateral?”
However, it was also highlighted that the process of filling in the fields is going to be all going to be programmed and not done manually on an Excel spreadsheet.
“I believe, will have a big benefit long term,” the speaker responded.
Another conference delegate warned that when management clearing is introduced, everybody needs to be aware of the fact that it doesn’t remove risk from the system; it is now being concentrated in a small number of clearinghouses around the planet and the risk itself isn’t gone.
The speaker mused: “How would we wind down a clearinghouse?”
“If a clearinghouse goes down that is catastrophic for our entire industry.”
Meanwhile, one audience member who previously worked for the European Securities and Markets Authority and helped draft some of the regulations stood in to defend the UMR.
“In the financial crisis, UK taxpayers lost hundreds of billions of dollars bailing out the banks. I see these regulations as a way to make sure we do not face a similar situation like that again. I am also a fan of central counterparties and I disagree that they are mitigating risks.”
Defending the banks on this point, a separate panellist added: “The cost of the crisis is not a fault of the bank entirely, I would say that is slightly overdoing it. We have to help each other but I think increasing regulation will backfire at some stage.”
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