With EU legislation in the hands of both political and regulatory institutions, getting the balance right between these powers is of critical importance to the effectiveness of market policy.
This is illustrated by the recent request from the European Securities and Markets Authority (ESMA) to the European Commission for a delay in implementing the reporting mandate for derivatives trades - a request that was denied. It is a matter of some concern that in an area where the regulator's technical expertise should be paramount, it can be over-ruled by a political institution.
The need for the delay sought by ESMA is clear to everyone participating in the markets. At present different pieces of reporting legislation (both from inside the EU and out) place three sets of reporting obligations on the same trades. These rules not only require submission to different authorities, but also differing information to be reported. The challenge is both to administer the reporting itself and cater for the different information requirements. Such a situation is neither effective, nor cost-efficient. ESMA requested the delay to ensure that it had enough time to develop proper guidance on reporting implementation to ensure that it would be carried out consistently across the EU. This guidance will now have to be rushed in order to meet the start of reporting in February (2014) and could lead to inconsistencies and inaccuracies.
ESMA is an expert body in the area of creation and implementation of financial legislation. Its responsibilities include not only the regulation of financial transactions, but also ensuring that everyone understands the impacts of legislation from the outset and the requirements for implementation. Therefore if it believes it is necessary to request a delay before putting ratified legislation into practice, the EU Commission would be well-advised to listen to it and not bow to the political pressure of 'being seen to be doing something'. The timing of this implementation is clearly of some political significance: a delay would mean a start date of after the next EU Parliament had been elected, with the 'credit' for the decision given to the new parliament.
The increasing complexity of financial regulation in Europe, and of the markets themselves, makes it increasingly difficult for any new piece of legislation to be considered in isolation. The result of doing so is to create contradictory or overlapping rules, which further confuse the market and place expensive compliance burdens on companies. Given this, EU legislators should carefully consider the existing rules for each market and make some attempt to align them before adding further legislation.
Involving industry stakeholders more closely could be of great benefit, particularly when addressing technical issues. Consultation, in the form of more direct discussions with legislators (on appropriate topics),could help keep regulation consistent and thereby avoid creating unintended consequences as well as improve its effectiveness. Publication of draft rules, for consultation and response by industry stakeholders would also allow industry representatives to advise on any potentially contradictory legislation.
The views expressed in this blog post are the personal opinions of the author and do not necessarily reflect the official policies or positions of the FIA European Principal Traders Association or the Futures Industry Association.
- FIA EPTA