EU Derivatives Rules: Still Waiting

WSJ: Way back in October 2008, the European Commission said it wanted to regulate over-the-counter derivatives trading.

Then in July 2009, the commission said it wanted to regulate over-the-counter derivatives trading.

Then in October 2009, the commission said it wanted to regulate over-the-counter derivatives trading.

Then in July 2010, the commission said it was about to propose to regulate over-the-counter derivatives trading.

Then in September 2010, the commission proposed … to regulate over-the-counter derivatives trading!

Then the parliament adopted its version of the legislation, and the EU governments agreed on theirs. But 17 months after the commission proposed to regulate derivatives trading, and nearly three-and-a-half years after the commission first proposed to propose to regulate derivatives trading, there is still no deal on derivatives legislation.

The council and the parliament have been squabbling, as they usually do, over how much responsibility should be given to EU authorities in the new regulation and how much should be left with national supervisors. (The parliament always wants more power for the EU than the governments.) The two sides are close, but a press conference that was scheduled Tuesday to announce a deal was cancelled at the last minute.

The reason? A dispute over how much power the European Securities and Markets Authority, the new EU markets regulator, would have to resolve disputes over regulating clearing houses.

For those unfamiliar with the EU, this is how the legislative process usually works. The commission has what’s known as the “right of initiative”: it’s the only institution that can propose legislation — but once proposed, the parliament and the European Council are free to alter it in far-reaching ways.

Now, the commission is an institution deeply concerned about building consensus for its ideas. It usually doesn’t propose things that have no chance of support from national governments; and it wants its proposals to survive talks between the parliament and the council relatively unscathed.

So the commission spends lots of time gathering input, holding informal discussions, meeting with working groups, publishing green papers, white papers  (or my favorite, “non-papers”), etc….

But all this takes a very long time and lots of manpower. And in the case of derivatives regulation, this process was frankly somewhat pointless: the broad strokes of new EU derivatives rules had already been agreed at international level by G20 governments, which were determined to tighten regulation of the sector after derivatives nearly blew up the global economy. The political momentum was there and the general direction — pushing more derivatives trading onto exchanges and clearing houses — had already been set.

So why the endless consultations?

At any rate, a deal is almost done. All that’s need is for the two sides to resolve the last remaining issue. Then the finance ministers and the parliament will sign off on the final version; then the EU leaders will sign off too, and then all sides will engage in years of haggling over the regulations that will implement what is, in the end, a very important new law.