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Newedge Warns of International Regulatory Arbitrage in OTC Derivatives

Supports regulatory harmony between the European Commissions proposals and the U.S Dodd-Frank Bill's private clearing initiatives.

Paris-based Newedge Group, the multi-asset brokerage and clearing firm, submitted comments supporting the European Commission’s legislative proposals to reform the OTC derivatives market, but encouraged regulatory harmony with U.S. reforms to avoid regulatory arbitrage.

Newedge has urged the Commission to harmonize the broad parameters of its future legislation with that of other jurisdictions around the world, particularly the U.S where private initiatives on OTC clearing are emerging in the wake of the Dodd-Frank bill. Newedge indicated this was critical if Europe is to avoid generating conditions that encourage regulatory arbitrage, according to the release, which summarized the firm’s comments to the Commission’s Public Consultation on Derivatives and Market Infrastructures. Newedge supports the Frank-Dodd bill and continues to work with the principal regulators on the key provisions that remain to be discussed.

In a statement, Nicolas Breteau, CEO of Newedge, said: “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 from the European Commission are generally consistent with the principles cited, but said the Commission should consider other key provisions such as a prohibition against rule self-certification by central counterparty clearing houses (CCPs) or a requirement that CCPS be open to buy-side participation through qualified brokers. Another source of international regulatory arbitrage would be a mismatch in granting exemptions for central clearing in the U.S. and Europe.. Exemptions for central clearing are still up for discussion in the U.S., stated Newedge. The firm said it supports end user exemptions for risk mitigation strategies for commercial enterprises, such as when it affects small commodity producers.

Newedge also said the Commission and other global regulators should discourage clearing solutions that artificially exclude brokers from participation. The ICE Europe platform, as well as CME Clearport and IDCG in the United States and SGX AsiaClear Singapore all permit broker participation. This helps strengthen the clearing process while providing buy-side clients non-dealer alternatives for execution and clearing, stated Newedge.

Newedge also favors that OTC swaps, if clearable, be traded through transparent, central execution facilities, to help encourage better pricing and increased liquidity, which is beneficial for end users and helps facilitate position liquidations in default situations, stated the broker.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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