European Fund Managers to Regulators: You Don’t Care About Us
September 1, 2010
European fund managers are mounting some strong opposition to pending legislation on the continent which would increase transparency in the burgeoning over-the-counter derivative market.
The Investment Management Association (IMA), the London-based trade group representing U.K. fund managers holding $5.2 trillion in assets has just bashed the Committee of European Securities Regulators for not consulting enough with buy-side firms. Its Paris-based counterpart the Association Francaise de la Gestion financiere (AFG), which represents French fund managers holding $3.3 trillion in assets, took a less critical approach but still agreed that some of the European Commission’s proposals would hurt fund managers.
Risky trading in over-the counter derivatives – contracts based on underlying assets including bonds and commodities or alternatively based on currency and interest rate fluctuations – has been blamed for worsening the credit crisis and contributing to the bankruptcy of Lehman Brothers.
On July 19 CESR asked for industry input on the European Commission adopting rules to promote the use of standardized OTC derivative contracts and central clearinghouses to reduce counterparty and systemic risk. The legislation, which could be adopted as early as next year, would also require the use of electronic confirmation systems.
“The regulators already have an existing pattern of working which should form the basis of future work – working with the International Securities and Derivatives Association and the key banks and central clearinghouses [CCP],” wrote the U.K. trade group for fund managers to CESR on August 30. “However, the process is significantly deficient in consulting the interests of end users of the market – whose interests should be believe be paramount in regulatory terms.” Those end-users are fund managers, corporations and the trade associations that represent those groups.
CESR is responsible for unifying regulation across Europe and the ISDA is the key trade group representing the banks and broker-dealers which trade OTC derivatives
While the IMA says that standardizing OTC derivative contracts sounds like a good idea, U.K. fund management firms were not in a position to immediately comment. More time was needed to evaluate the ramifications of how broker dealers, banks and clearinghouses were preparing. “Sufficient time should be allowed to implement new systems; the buy-side of the market has to wait until the sell-side and central counterparty providers have completed their work before making their own decisions,” wrote the IMA. “We do not see anywhere that this timing mismatch has been recognized or addressed.”
The IMA said that it could also not comment on the merits of exchange trading of OTC derivatives because of the lack of any details on how trading would be migrated to electronic platforms.”The assessment does not articulate how CESR sees the process to bring contracts into exchange trading occurring in practice. This is an essential missing element and without it we believe the assessment is somewhat artificial,” wrote the trade group.
The IMA also urged European regulators not to require traders in OTC derivatives to use electronic confirmation systems. “The market should be allowed time to come up with a range of solutions suitable for all their clients. It would be counterproductive if smaller end users were to lose the ability to hedge their business because regulators had required mandatory two-way electronic confirmations,” wrote the trade group.
