According to apparently well-informed reports in Germany’s Spiegel and the UK’s Daily Telegraph, three new European financial market super-regulators are on their way to being established.
According to the German weekly, banks will be monitored by a London-based European Banking Authority (EBA), trading in securities controlled by a Paris-based European Security and Markets Authority (ESMA) and insurance and pension funds monitored by a European Insurance and Occupational Pensions Authority (EIOPA) in Frankfurt.
The new oversight authorities would have the power to issue direct orders to national supervisors, with the caveat that directives would be limited to measures "that have no impact on the financial responsibilities of the member states". In other words, they wouldn't be able to directly influence national budgets.
According to the Telegraph, ESMA’s draft statute will require that all OTC derivatives be settled through a central counterparty and that "derivatives should be appropriately priced in relation to the systemic risks they entail, in order to avoid these risks being passed on to the taxpayers." It's certainly hard to argue against these plans.
But Ambrose Evans-Pritchard of the Telegraph goes on to write that ESMA will also be empowered to "counter excessive price movements or excessive concentration of speculative positions".
This language is highly reminiscent of the words used by the head of the US futures market regulator, the CFTC, a few months ago. “I believe that the CFTC has a duty to protect the American public from fraud, manipulation and excessive speculation,” Gary Gensler said, before going on to recommend the implementation of position limits in the energy markets.
In fact, Gensler was in Brussels a few weeks ago, where he told the European Commission that “international coordination is essential to ensure comprehensive regulation of the OTC derivatives markets. We must not leave gaps in our regulatory structure that allow traders to evade one country’s regulations by taking their business elsewhere.”
The recent shift of assets (which we reported on IndexUniverse.eu four weeks ago) out of the US natural gas fund (NYSE Arca: UNG) into competing gas trackers in Europe and Canada following the CFTC’s threatened imposition of commodity trading limits in the US might be seen as precisely the kind of trend Gensler is referring to.
There’s a history in certain European markets of decrying market movements as the work of evil speculators (I’m thinking of the reaction of the French and German governments to the pressures that developed around the European exchange-rate mechanism in 1991/92), so Gensler’s appeal might have struck a chord with some of the commissioners.
Since a large part of the European ETF market is derivatives-based, relying on the swaps market to deliver index returns, I imagine that the senior managements at many issuer firms will be keeping a very close eye on how ESMA is constituted and the measures it takes to regulate the OTC market. Pricing swaps slightly differently following a move onto a central trading platform is one thing; intervening in the derivatives markets or even banning certain trading activities to prevent “excessive price movements” is quite another.
Ultimately, a regulatory approach in the US and Europe that is too heavy handed could push some of the index-tracking business away from these regions altogether. Could the core of the global ETF business be in Dubai, Singapore or Shanghai in 10 years' time?