DERIVATIVES-ESMA's Maijoor calls for third-country oversight
Europe’s key derivatives regulator has stressed the need to extend its oversight to third-country financial services providers such as overseas clearinghouses, as the UK prepares to leave the European Union.
Speaking at ISDA’s annual general meeting in Lisbon, Steven Maijoor, chairman of the European Securities and Markets Authority, questioned a regulatory framework that relies fully on third-country regulators to oversee risks that their market participants might create in the EU, once a regime achieves the same supervisory outcomes.
“Although recognising there has been some substituted compliance in other jurisdictions, the reality is that it is a system that is mainly beneficial to third countries doing business in the EU,” Maijoor said.
“In the EU, if market participants want to do business outside the EU, they become subject to the third-country regulatory system and the EU regulatory system. Obviously, that was not the intention. The intention was one regulator per market participant at a global level.”
His comments came as EU lawmakers debate possible location requirements for euro swaps clearing following Brexit. London-based LCH is currently home to the majority of euro interest rate swaps clearing via its SwapClear platform, and many policymakers are calling for those activities to be moved to the EU 27 following Brexit.
Maijoor welcomed the European Commission’s communication last week, which confirmed intentions to table legislative proposals that would enhance the supervision of third-country CCPs. Those proposals are expected in June.
In his keynote speech on Tuesday, Maijoor emphasised the need for regulators to have greater oversight powers over risks that third-country market participants might be creating in the EU.
“We’re all human and all subject to limited resource, and it’s natural for a national regulator to have the tendency to give the risks in its own jurisdiction a higher priority,” he said.
“We’re trying to get the same system that helps the global character for derivatives markets, but at the same time ensure that our objectives of investor protection, stability and functioning of markets are met.”
ESMA is currently working on a set of principles regarding outsourcing and delegation issues, which EU 27 regulators would need to take into account when a UK market participant ceases to locate activities in the EU 27 bloc, in an attempt to avoid a situation that could see overseas entities setting up so-called “letter box” entities in the EU while continuing to operate out of the UK.
ESMA will also publish specialised opinions on the issue relating to asset managers, investment firms and trading venues.
Maijoor noted that Europe’s system of recognition varies across different rule sets and must be looked at on a case-by-case basis.
“The first step is to try and get consistency. This is not a one-size-fits-all market, but more consistency would be helpful.
He also called for powers to charge third-country entities to be recognised by ESMA - as is the case for ratings agencies and trade repositories that the regulator currently supervises.
ESMA may struggle to secure additional resources, however, as Kay Swinburne, member of the European Parliament and vice-chair of its Economic and Monetary Affairs Committee, aimed to justify ESMA’s limited resources, noting that it relies on national competent authorities for oversight.
“ESMA was set up deliberately to be lean and mean,” Swinburne told reporters. “The idea was that it was never supposed to be duplicative. It was supposed to be that coordinating body and an enforcer of the rulebook rather than doing the work for itself.”
She also said that the ECB might be the frontrunner for regulating central counterparty clearing firms if the central bank goes head-to-head with ESMA for the role following Brexit.
“My suspicion is that after Brexit there is going to be a significant push for a single supervisor of CCPs in the EU 27,” Swinburne said.
“If there is a push, I’m not sure who will win. In terms of what I want, supervision would lie with the ECB. They have expertise that goes beyond market observation.
“EMSA has never been a hands-on supervisor; it’s the writer of rulebooks and enforcer of rules, so it’s a very different role to hands-on supervision. CCPs are complex institutions, so you want experts to supervise them.”