Derivatives clearing: Smoke but no fire

 

22 DECEMBER 2014

BY JEREMY WOOLFE

In Brussels, there are two types of hell, Jeremy Woolfe explains

There are two sorts of hell. Hell today, and hell tomorrow. That is, if the EU financial big-wigs in Brussels manage to put off today’s economic agony, they can be sure of risking more of the same tomorrow. Or worse.

The anguish centres on whether workplace-based pension fund mangers will be able to escape having to clear their trades in derivatives via clearing houses and for how long in the future.

The issue comes in the European Market Infrastructure Regulation (EMIR), which aims to reduce hazards associated with the derivatives market.

Notification of any extension to the occupational pension exemption was due for decision by the European Commission in mid-August.

“So please may we know the outcome?” was the question back then. And repeated at the end of the month. One’ll have to wait “a few more weeks”. Ah, well…! October to November? Still nothing! Early December? At last! Something! Expect to hear before Christmas! Thank you European Commission, thank you, indeed! But is this promise credible?

Behind the various Brussels scenes, including in the Council, where the EU national governments meet, there emerges a plethora of indications of lips being stitched shut. This could signal confusion, disagreement, tension, Faustian bargaining?

Request for wisdom from the PR man for one EU national representation, itself likely to be heavily involved, was answered by: “Derivatives? Sorry, I’m really not much into that myself.”

Better try the Americans, who, under Dodd-Frank, already have rules that pension fund derivative trades do have to be cleared, and should be motivated to see trans-Atlantic fair play.

The recorded message, from the so-described “key man” cheerily stated that a general strike in Belgium was keeping him away from the office today. (In fact, the strike was the previous day).

Tracked down eventually, he passed the inquiry on to a colleague, who passed it again, and so on, to, finally, the official press office of the “US Mission to the EU”.

Some light on the subject? Actually, not much! “We can’t really comment on this. Best regards …”

Similarly, from a particular pension fund interest (described by a bystander as dealing with the matter for itself and others), came the words “at the moment, we choose to wait and see what happens”.

Only InsuranceEurope, for insurance-based pensions, would fully articulate its stance. Its members do have to trade using central counterparty clearing houses (CCPs), it stated. The institution argues against the need. But no, it added, it was not itself involved in lobbying.

However, one press spokesman, discussing commission president Jean-Claude Junker’s general position, conceded “I do understand the matter of principle involved”.

The moral issue is that, if the EU does not buck up its economy fast, the political consequences don’t bear thinking about. In other words, Junker is targeting a kind of hell, today.

On the other hand, the PR granted that even the common citizen was aware that financial markets lacking oversight can nose dive dramatically.

Moreover, the fluttering paper on which the derivative contracts are written represent some years of global GDP. Potentially terrifying prospects? Hell tomorrow?

So, emphatically, the PR promised to find out the official position of his own government’s financial department.

Splendid!

Splendid, that is, if that position ever arrives!