Differences over how Europe and the United States plan to regulate derivatives is muddying the picture for buyers, who could be saddled with higher costs, a top industry official told the Reuters Global Financial Regulation Summit.
Derivatives were central to the near demise of U.S. insurer AIG during the financial crisis, and the unpoliced $450 trillion sector is being made more transparent and less risky.
"Higher costs are inevitable. The concern of the end users is by how much," said Anthony Belchambers, chief executive of the Futures and Options Association.
"If you load the dealer up with all sorts of additional requirements in this climate, they are not going to absorb it but pass it on," Belchambers said.
Judith Hardt, secretary general of the Federation of European Securities Exchanges, disputed this.
"It is likely that the increased use of transparent infrastructures, such as clearing houses and exchanges, will increase the transparency in this market and put pressure on prices," Hardt said.
The G-20 group of leading countries reaffirmed at the weekend its pledge for central clearing and electronic trading of all standardized contracts, where appropriate, and the reporting of all transactions to repositories.
"They have exactly the same broad-brush targets but when you get down into the weeds it becomes rather different and indeed you can identify some really quite significant differences," Belchambers said.
There is a push in the United States for ownership caps on clearing houses to stop dealers having undue influence, while the European Union is moving toward using governance safeguards.
The United States may introduce mandatory exchange trading for some contracts, a step too far for some in the EU. U.S. banks may have to spin off swaps desks, a provision not yet on the EU agenda.
Non-financial users like airlines, that make up about 13 percent of the market, want exemptions from clearing, but the EU and United States may end up with different conditions for this.
"It's those sorts of differences which could, if they are retained, make a real difference collectively in how people view the two jurisdictions," Belchambers said.
"In the United States, bilateral electronic trading looks at the moment as if it may not be permitted for cleared contracts," Belchambers said.
"You may reach a situation, hopefully, where the dealer execution model will be preserved in the EU, they will be able to bilaterally execute trades even though they go to central clearing," he added.
A U.S. law may be adopted in coming weeks, but the EU has yet to propose its draft, which will take months to approve.
"We'll tackle the derivatives market in June. To bring light to a very dark world," the bloc's financial services chief, Michel Barnier, said in a speech on Monday.
"We need more transparency, greater harmonization of products, registration in trade repository, and compulsory clearing via central clearing parties," Barnier said.
Divergences between the EU and other countries in derivatives is bad for competitiveness and creates the risk of regulatory arbitrage, Barnier said.
Clashes between brokers and exchanges are also likely in the EU over how much should be traded publicly in future.
"As long as we can deal with trade reporting and transparency, there is nothing about the execution process that is wrongful or contrary to public policy so let's abandon this nonsense about bilateral execution," Belchambers said.
Exchanges have yet to push for broker ownership caps on clearing houses even though much of the business in credit default swaps has gone to ICE, backed by brokers.
Hardt says exchanges would improve the pricing of some contracts, enhance transparency and help clearing houses, though bourses are not pushing for ownership caps on clearers yet.
"We understand that the Commission is not focusing on the ownership of clearing houses. We believe that governance issues are at the heart of the EU proposals and in particular the organization of the risk committees," Hardt said.
"These committees are important as they will be involved in determining which contracts will be "eligible' for clearing. They will be at the heart of the competition between clearing houses," Hardt said.
Belchambers said central clearing is not the answer for all trades, as bilateral collateralization can be used in many cases.
"We don't all need to climb into an expensive Rolls Royce clearing at vast cost to take us from A to B when in reality a Ford truck can do it just as well," he added.
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