EU Consultation on OTC Derivatives: Implications for Cross-Border Harmonisation
by Shoosmiths LLP
A consultation published by the EU Commission on which over-the-counter (OTC) derivatives identifier would best facilitate price transparency closed at the end of last week.
While we will need to wait until mid-2024 to hear the Commission’s findings, there are a couple of points of much broader impact and interest to all those interested in operating a multinational business, market structure, technology, digital assets, regulation, cross-border rule harmonisation and data privacy.
The challenge I set to you is to replace the words “OTC derivatives transactions” and “price transparency” below with any two examples relevant to your own fields, including but by no means limited to (a) “suppliers” and “traceability”, (b) “QA testing” and “reliability”, (c) “staff training” and “quality” or (d) “AML/KYC data” and “proper accountability”.
- How does one ensure that an OTC derivatives transaction is reported and recorded as unique and how are those reported data collected to provide price transparency?
- However one decides is the best way of ensuring this, what happens if another country already has rules and does it a different way?
- What happens if what one decides requires significant cost for those subject to the new rules?
The Commission is consulting on the first question.
The Commission has identified already that the data contained in two existing unique identifier systems – ones in common use already and to which most EU participants’ systems have been adapted already – are too granular or not sufficiently granular (respectively). This is because they were designed with different purposes in mind (where neither purpose was price transparency).
Essentially, in order to make an existing identifier fit for purpose, the not-sufficiently-granular identifier would require a reporting party to add information to it (option 1) and the overly-granular identifier would require a reporting party to remove information from it (option 2).
The United States opted for option 2. If the Commission plumps for option 1, then EU firms will have systems which require less adaption.
If the Commission follows the US’ lead, then those firms which have built reporting systems already to comply with US rules will be happy (or at least have to spend less to adapt their systems) but EU firms with no existing US reporting obligations will have to rebuild their existing data-capture and -reporting systems.
Should the Commission attempt to harmonise its rules with the US’, as it is “second-mover” in this scenario or attempt to reach its political and regulatory goals with as few changes to its existing rules (and as little cost and disruption) as possible?
What would happen if compliance with the existing rules was patchy and/or the data collected was of poor quality? Would that change the Commission’s views?
In conclusion, the EU Commission’s consultation on the OTC derivatives identifier is a niche subject, but the principles of the issues faced in this example have broader application for multinational businesses, market structure, technology, digital assets, regulation, cross-border rule harmonisation, and data privacy.
The Commission’s decision will have significant impacts on firms operating cross-border and will shape the future of cross-border rule harmonisation. Ultimately, the Commission must balance its political and regulatory goals with the need to minimise cost and disruption for firms subject to the new rules.