The European Union's chief financial regulators rejected draft changes to collateral standards for derivatives, further complicating Europe's efforts to complete the rule after failing to meet a global deadline this month.
The regulators opposed a proposal by the European Commission, the EU's executive arm, to exempt pensions from some of the requirements. In a statement on Friday, they said the restrictions are "crucial for mitigating potential risks" in the US$493 trillion global market.
The Brussels-based commission is assessing the regulators' position, a spokesperson said. The technical standards must be sent to EU lawmakers for consideration before they take effect.
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Europe said earlier this year that it wouldn't meet a Sept. 1 deadline, which sparked criticism from the U.S. and Japan that efforts to coordinate rules were breaking down and threatening to fracture the market. The U.S., Japan, and Canada went ahead with the rules applying to the biggest swap dealers, including JPMorgan Chase & Co. and Citigroup Inc., while the EU, Switzerland, Hong Kong, Australia, India, and Singapore announced delays.
"While the thoroughness of the EU legislative process is to be supported, market participants will no doubt be concerned about the time it will take not only to align with the U.S., Japan, and Canada, but also for certainty around the form of the final rules so that they can start taking steps to comply," said Deepak Sitlani, a derivatives partner at Linklaters.
The Financial Stability Board, a global group of regulators, last month called for the rest of the world to take urgent action to put the rules in place and warned that there are risks of missing additional deadlines in the rule. The rules are designed to boost the amount of collateral backstopping transactions and to limit the threat that one firm's default would spread risk throughout the financial system.
The commission had called for pension funds to get an exemption from requirements that force firms to have a broad pool of collateral and prevent them concentrating their holdings among a few sovereign issuers. The commission said the concentration limits would introduce costs and additional risks to pensions and should be changed "to avoid excessive burden on the retirement income of future pensioners." Pension liabilities to retirees are typically denominated in local currencies, and their investments must normally be in the same currency, the commission said.
The three EU regulators also called for additional changes, including more clarity for standards for trades with counterparties based outside Europe.
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