The European Union’s new derivatives regulations need to apply to non-financial companies as well as banks and other investment firms, according to the European Securities and Markets Authority.
The Paris-based regulator also defended its efforts to improve oversight of bond-market trading and central counterparties, in a Sept. 2 letter to nations and the European Commission. ESMA is working to implement the EU financial markets legislation known as MiFID II that was approved last year and has recently come under fire from Germany, France and the U.K. for its potential to hurt securities markets.
Draft rules are under legal review, aren’t final and are being developed with public comment in mind, ESMA said in the letter. It urged stakeholders to bear with the lack of details on some measures, “especially on topics where our own ESMA Board of Supervisors, which is mandated to work in full independence, has not arrived at a firm position yet.”
One area of debate will be when non-financial companies are required to get licenses under the new rules. ESMA said it doesn’t make sense to exempt companies that are active on derivatives markets, nor should banks and non-financial firms face different rules for the carrying out the same activities.
“We are aware that the stakes are high and we take careful note of the concerns expressed from the energy and other non-financial sectors,” ESMA said.
“Creating a test that will exempt all non-financial players, including those that are substantially involved in speculative trading in commodities derivatives, would clearly be against” the intentions of the law, the agency said. “ESMA instead is proposing a real test while designing it in a cautious and pragmatic way.”
On the subject of central counterparty regulation, ESMA said public feedback has led to revisions of its initial proposal “with respect to the definition of economically equivalent contracts and their non-discriminatory treatment with respect to netting.”
Germany, the U.K. and France said ESMA’s approach to determining the liquidity of securities could have an “unintended consequence,” according to an Aug. 25 letter that the three countries’ finance ministries sent to ESMA and the European Commission. They said instruments that would be better served by waivers might fall under the new rules, “with resulting significant negative implications for the proper functioning of these vital markets.”
The Association for Financial Markets in Europe, which represents firms including Deutsche Bank AG and HSBC Holdings Plc, has also has said the plan’s definition of market liquidity would damage trading by applying the transparency standards too broadly.
Market transparency remains a difficult area to balance competing needs, the agency said. Rules for non-equity securities cover a wide range of asset classes, particularly in the area of derivatives, it said, and it will be “technically extremely difficult” and also “essential” to set proper thresholds for liquidity assessments and large transactions.
“We will not be able to find the ideal system balancing transparency and liquidity and at the same time satisfy the preferences of all stakeholders,” ESMA said. “We do believe that we have made significant progress towards creating a more adaptable and better calibrated system.”
An ESMA spokesman declined to comment on the document.