* Derivatives industry sees more uncertainty over EU rules
* Lawyers say many months before full picture known
* ESMA, EC see new rules not in full effect until end 2012
By Huw Jones
LONDON, Feb 10 A deal on European Union
rules to crack down on derivatives has triggered fresh anxiety
over when the $700 trillion sector must start complying,
industry and legal experts said on Friday.
The agreement becomes law when published in the bloc's
Official Journal within several weeks. The crucial implementing
measures, however, will not be in place until year-end or early
This disconnect opens up a legal grey area for some.
"There will be some uncertainty as to where exactly this
will bite," said Richard Metcalfe, head of global policy at the
International Swaps and Derivatives Association (ISDA).
The rules follow a pledge made by G20 world leaders in 2009
to shine a light on a sector central to the financial crisis.
They mandate clearing and reporting of transactions by the
end of 2012 so that regulators have an instant snapshot of who
is behind every trade when things go wrong, a lesson learned
from the collapse of U.S. bank Lehman Brothers in 2008.
"Even though the regulation has been agreed, some companies
will not know exactly how it affects them until the details that
have been delegated to the Commission have been decided," said
Hannah Meakin of law firm Norton Rose.
The European Securities and Markets Authority (ESMA) will
thrash out those details by the end of September, with a further
three months for the EU's European Commission to approve them.
ESMA said on Friday the law will come into force following
the endorsement of its technical standards by the Commission.
A European Commission official said the law is effective
once published in the Official Journal but "full practical entry
into force" will not take place until ESMA's standards are
"This means the entirety of derivatives rules should be in
force early next year, in time to mee the G20 commitments," the
Commission official said.
Ed Parker, a derivatives lawyer at Mayer Brown, said it is
incredibly unlikely that the EU law would be allowed to come
into force without the ESMA standards in place and he expects no
problematic legal "gap".
Industry is viewing the next few months as a double-edged
sword: while it may create uncertainty it also means that ESMA
has more time to consult and get its rules right.
Many of the changes in the law are already underway.
"The bottom line is that the industry has done a lot more to
address systemic risk than what is in this legislation," ISDA's
"We have trade repositories up and running or in the works
for all major asset classes. You have clearing steaming ahead
having already been well developed by the time the crisis
happened," Metcalfe said.
Even when the fog over EU rulemaking has lifted, there will
still be some unknowns embedded in the rules as banks will not
know for sure if their contracts require clearing later on.
Clearing involves extra costs like an initial margin from
the customer and industry officials say some clients may balk at
this costly change in terms and go to the courts.
Banks are looking to see how ESMA will define when a
contract is used for hedging, such as by an airline to guard
against adverse price moves in jetfuel, and thereby be exempt
from clearing. ESMA will also have to define when a contract is
standardised enough so that it must be centrally cleared.
One of the biggest reforms for the industry is not even part
of the EU law and likely to be the most expensive.
The Basel Committee of global bank supervisors is to rule
how much collateral banks must post to cover their derivatives
exposures to clearing houses, which will change the economics of
"The price banks will quote for long term swap will be a lot
higher due to the capital they have to put up against it," said
Alex McDonald, CEO of the Wholesale Market Brokers' Association.