* Regulators studying collateral vs liquidity trade off
* Regulators see push for segregated accounts for margins
* EU's ESMA say some rulemaking deadlines now unrealistic
* ESMA says new EU trading rules must be tailored to markets
By Huw Jones
LONDON, Feb 8 A welter of new financial
rules may need to be phased in and more finely tailored to avoid
draining too much liquidity from markets and the wider economy,
European regulators said on Wednesday.
The European Union is introducing rules from this year to
curb shortselling, regulate derivatives and reshape off-exchange
trading, all of which will force banks to rethink their business
One aim is to make trades less risky by backing them with
collateral such as government bonds and cash.
But with many government bonds suffering from lower credit
ratings and cash scarce, banks and regulators worry too much top
quality liquidity could be tied up in collateral rather than
being put to use in economies and spurring growth.
"We are very conscious of potential liquidity implications,"
said Barry King, senior associate for OTC derivatives policy at
the UK's Financial Services Authority.
The FSA and other regulators from around the world have set
up a working group to study whether making it mandatory for both
sides of a trade to post initial margins would generate too much
of a drain on liquidity, King said.
Regulators are also looking at the extent to which
collateral should be segregated so that it cannot be used for
other purposes. Pension funds want to move towards individual
segregated margin accounts at clearing houses, King said.
"The first priority has to be financial stability and
achieve it in a way that maintains liquidity wherever possible.
I don't think this is being overdone," King told an Association
for Financial Markets in Europe banking lobby conference.
There is a real risk that there won't be sufficient time for
markets to adjust, and some of the reforms may need to be
introduced in a staged process, King said.
Next Monday the European Parliament kicks off the approval
process for a sweeping update of market rules governing such as
things as trading in off-exchange derivatives, a draft law
dubbed MiFID II.
The current MiFID rules opened up share trading to fierce
competition with strict transparency rules, but banks fear the
lawmakers will try to impose this model onto other markets
including bonds and derivatives.
Simon Maisey, a managing director at bank JP Morgan
said there were dangers to imposing one particular market
structure on another.
"It's pretty well understood now the difference between
fixed income and equities," Maisey said. Markets have evolved
over many years, and introducing a step change overnight risks
destroying their liquidity, he added.
Steven Maijoor, chairman of the European Securities and
Markets Authority, which will flesh out implementing measures
for MiFID II, offered some reassurance.
"The calibration of transparency regimes has to be
undertaken per asset class and in many cases per type of
instrument within each asset class so as to avoid that
transparency harms liquidity," Maijoor told the conference.
"Hence, we should not opt for a mechnical extension of the
MiFID equity transparency requirements to non-equity financial
instruments," he said.
It was not only banks that need more time to adjust to the
new rules, ESMA and other regulators themselves needed more time
to agree them in the first place, Maijoor said.
The deadlines to agree implementing measures for the new EU
short-selling law "are too short", and the end-2012 deadline for
new derivatives rules was "challenging", he said.
"We are clearly not at cruising speed. We need more people
to do the work," Maijoor added.