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Newedge welcomes EU derivative reform

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Newedge Group, a provider of multi-asset brokerage and clearing, says it supports the European Commission’s legislative proposals to reform the over-the-counter derivatives market.

The firm recently submitted its comments to the Commission’s Public Consultation on Derivatives and Market Infrastructures.

Newedge has urged the Commission to harmonise the broad parameters of its future legislation with that of other jurisdictions around the world, particularly the US where private initiatives on OTC clearing are emerging in the wake of the US Dodd-Frank bill. This is critical if Europe is to avoid generating conditions that encourage regulatory arbitrage.

Newedge largely supports the Dodd-Frank bill and continues to work with the principal regulators on the key provisions that remain to be discussed.

Nicolas Breteau, chief executive of Newedge, says: “We believe that regulatory reform that promotes client clearing and exchange execution of OTC derivatives – when possible – is necessary to achieve lower systemic risk and at the same time allow derivatives to continue to play a useful role in the economy. The legislation in the EU and in the US alone would already benefit most participants of the global OTC markets – as more transparency should lead to lower spreads, higher liquidity and volumes benefiting both liquidity providers and liquidity takers – including end users.”

Newedge believes the proposals by the European Commission are generally consistent with the above principles, and in some cases explicitly support them. However, the Commission should consider including other key provisions, such as a prohibition against rule self-certification by central counterparties, or a requirement that CCPs be open to buy-side participation through qualified brokers. 

The reform package requires absolute clarity on the role and governance of CCPs in order to be complete. Exemptions to central clearing are still being discussed in the US and any mismatch with similar exemptions in the EU is a potential source of significant international regulatory arbitrage. In both jurisdictions, Newedge supports end user exemptions for risk mitigation strategies for commercial enterprises, subject to a threshold, particularly adapted to the needs of small commodity producers.

Newedge also believes that the Commission – and all other global regulators – should discourage any clearing solutions that artificially exclude brokers from participation. The ICE Europe platform, as well as CME Clearport and IDCG in the US and SGX AsiaClear in Singapore, are all examples of robust clearing systems that permit broker participation which helps strengthen the clearing process, while providing buy-side clients non-dealer alternatives for execution and clearing.

Newedge also favours that OTC swaps, if clearable, be executed through transparent, central execution facilities, absent an extraordinary rationale. Centralised execution helps encourage better pricing and increased liquidity which is beneficial for end users of such products and helps facilitate position liquidations in default situations.

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