Derivatives Data at Heart of Clearing Dispute in Scandinavia

Updated on
  • Swedish debt office is latest to raise data-quality questions
  • ESMA says it's reviewing the concerns before setting new rules

Scandinavia’s finance industry has found an unlikely ally in its fight against stricter rules for the region’s over-the-counter derivatives market.

Sweden’s debt office is echoing concerns raised by banks and brokers that data behind a derivatives study in Scandinavian currencies may be faulty. Any decision to impose clearing requirements on interest-rate swaps and forward-rate agreements in the region would be based on the data in question.

“There has been a rush to collect the data by the regulators,” Thomas Olofsson, head of debt management at the Swedish National Debt Office, said by phone. “As it is new data that has never been reported before, it looks as if it may lack quality. You become uncertain when you see examples.”

Since 2007, trading in interest-rate swaps and forward-rate agreements in Scandinavian currencies has jumped as much as five-fold, according to European Securities and Markets Authority data. That’s led the agency to identify five interest-rate derivatives in the region as liquid enough to warrant their being processed by a clearinghouse.

But ESMA’s proposal has drawn protests from the bankers’ associations in Norway, Sweden and Denmark. They argue derivatives volumes are smaller than the ESMA data would indicate. Imposing clearing rules on such diminutive markets would disrupt a well-functioning system and potentially leave investors holding un-tradable securities, they say.

“We are not sure the numbers in ESMA are 100 percent correct,” said Lars Afrell, deputy director at the Swedish Securities Dealers Association. “The liquidity is not as good as described.”

Recent increases in volatility have raised market risks to the highest level possible, ESMA said on Monday. The agency raised its markets-risk indicator to “very high,” after what it described as a “sustained build-up” in previous quarters.

ESMA spokesman Reemt Seibel said the agency will review the banks’ concerns as part of its routine practice of considering all responses when drawing up new regulations.

“They’re fair arguments and ESMA appreciates them and will take them into consideration,” Seibel said by phone. “We have to strike a balance between implementing the regulations and respecting business needs.”

The Paris-based regulator has won backing from the central banks and regulators of Sweden, Norway and Denmark. The Swedish debt office is also in favor of enforcing central clearing to reduce counter-party risk. Olofsson says the office has prepared for clearing rules to take effect for some months now, and would like to see them implemented as soon as possible.

Though Olofsson would like to see any decision based on reliable data, he says that once introduced, central clearing will create a “more homogeneous” market. It will also help avoid “a mess if someone defaults.”

It’s not the first time regulatory progress has been hampered by doubts about the quality of the data used to draw conclusions.

“You have to ask yourself why they are lacking good data,” Olofsson said. Similar questions have been raised about data ESMA is using to implement the Markets in Financial Instruments Directive, he said.

Germany, the U.K. and France called on ESMA this month to reconsider its approach for determining which securities should be subject to the new transparency rules after concluding the method captures too many instruments and risks damaging markets.

ESMA said last week it is reviewing responses to its consultation paper before making a final recommendation. The agency identified the five Scandinavian derivatives for clearing as part of a larger proposal for European currencies outside the euro. In August, the European Commission approved ESMA’s recommendations on interest rate derivatives denominated in euros, dollars, yen and pounds.

“From our point of view, it is good to have a plan and not to delay,” Olofsson said. “But we haven’t -- can’t -- check the data.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE