Europeans struggle to set derivatives rules
Faced with intense lobbying from the oil and commodity industries, the European Union plans what could be a last-ditch effort on Tuesday to reach agreement on one of the biggest issues to come out of the 2008 financial crisis: how to rein in trading of derivatives and other complex instruments.
The goal is to bring greater transparency to the market in sometimes opaque or exotic securities and reduce the risk of the sort of unexpected calamities that brought the global financial market to its knees.
A meeting of European Union officials on Tuesday will be the first since talks unraveled last month, leading to an unusual flurry of sometimes caustic posts on Twitter among the participants. If new rules are not adopted soon, the whole process could be set aside as the union prepares for its spring parliamentary elections, after which any unfinished business would have to be taken up anew.
"It will either get done, or it will get abandoned," Sharon Bowles, a blunt-spoken British lawmaker who leads the European Parliament's Economic and Monetary Affairs Committee, said in an interview.
The difficulty of the negotiations has shown that Europe is having many of the same problems the United States had in erecting a firewall against future financial crises — but with an even slower and more cumbersome political process. The proposed overhaul stems from commitments made by the nations in the Group of 20 after the financial crisis, and many similar measures have already been put in place by United States lawmakers and regulators.
The negotiations in Europe are also unfolding months — and in some cases years — after regulators in Washington completed their own set of parallel rules under the Dodd-Frank Act of 2010.
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The European authorities and Washington regulators have clashed over just how far to go in overhauling financial regulations. The Commodity Futures Trading Commission, the main United States regulator that oversees derivatives trading on Wall Street, has adopted a plan to regulate European branches and affiliates of American banks if the European Union's rules are not "comparable" to and as "comprehensive" as its own.
Several rules are at issue in the Brussels talks. But the main one is known as the Market in Financial Instruments Directive, whose scope would reach well beyond the financial sector.
Many big corporations outside the financial sector use derivatives to hedge their risks, which is among the reasons a wide range of companies — including the cosmetics giant L'Oréal, the news and information provider Thomson Reuters and the oil giant Exxon Mobil — have voiced concerns about how the proposed rules could impinge on their operations.
The new rules cover a broad range of financial activities, including restrictions on high-frequency trading, limits on traders' ability to corner markets in commodities like grain or corn, and greater transparency on trading activity that is not currently public.
Oil and commodities firms have been making a quiet, 11th-hour push to scale back the scope of the rules. Their effort has been led by industry groups like the Commodity Markets Council, based in Washington. That group's European arm, which includes oil and agriculture companies, recently circulated an appeal to policy makers, urging them to exclude a broad swath of widely used contracts from the regulatory scheme.
But the European Commission, the government's executive branch, has resisted any such exemptions.
The issue came to the fore on December 18, when officials assembled in Brussels from the three branches of European Union government — the Parliament, the European Commission and the Council of the European Union, which represents the leaders of the 28 individual member countries. Such three-sided negotiations are typically known as a trialogue. But the session became so acrimonious and unexpectedly public that one Brussels watcher called it a "tweet-a-logue."
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The crux of their disagreement centered on a crucial sliver of the proposal that defines the term "financial instrument." Commodity firms and oil companies are particularly concerned about the treatment of so-called forward contracts, which are used to promise the delivery of various commodities — whether oil or pork bellies — at a future date at an agreed-upon price.
While such contracts are often used to hedge risk or to engage in market speculation, lobbyists have raised concerns about what happens to firms that actually physically settle these forward contracts.
The Commodity Markets Council, in a recent memo, contended that subjecting such contracts to the same regulations as derivatives — instruments based on some form of underlying financial security — would require some companies to restructure their business models and potentially force them to be regulated like investment firms.
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That could sap the profitability of nonfinancial businesses like "a company in Germany that buys and sells barge-borne cargoes of petroleum products," the group wrote, or "an independent U.K. power generator that sells electricity but engages in no financial trading."
David Reed, a partner here in Brussels at the lobbying firm Kreab Gavin Anderson, whose clients include finance and energy companies, said, "Particular attention should be paid to energy products in order to avoid unintended consequences" — particularly subjecting them to trading costs that could drive up energy prices for consumers.
Such arguments have held sway with the Council of the European Union. At the meeting last month, the council proposed to exempt many types of oil and energy contracts from the new regulations, according to accounts of people who attended.
Ms. Bowles sided with the council. Regulating physically settled forward contracts, she said, "would add to energy costs but for no purpose."
But the European Commission balked at that idea last month. It argued at the December meeting that such products should not be left unregulated and should be exempted only if they were subject to a separate European regulation related to gas and electricity contracts.
"The commission believes physically settled forwards should be subject to the same regulatory standards as other similar instruments," Michel Barnier, a Frenchman who is the top commission official overseeing the issue, said in a statement on Monday. He said he was "confident and hopeful" that an agreement would be reached on Tuesday, adding that it would "represent a key step toward establishing a safer, sounder and more responsible financial system and restoring investor confidence."
At the December 18 meeting, as negotiations stretched late into the night, signs of frustration became evident.
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Tweets by Ms. Bowles became increasingly acerbic. "Everyone back in the room, but still four different conversations going on," read one. Later, referring to nongovernmental organizations, she wrote, "Compromises won't happen, fear of N.G.O.'s berating even tentative deals. So will end up with nothing."
And then, as often happens in European negotiations, fissures among the chief nations emerged. Ms. Bowles tweeted, "Strangely the only things introduced by the commission appear to be French concerns …"
In a retort to Ms. Bowles, Mr. Barnier wrote in his own tweet that he was concerned with "Transparency, access & fair competition" and that the "commission wants fair deal 4 investors & consumers."
On Tuesday, one key dynamic will be different — the council's presidency has rotated from the Lithuanians to the Greeks. And the new temporary Greek leadership has been trying to broker a complex compromise in recent days. Among other things, Greek officials are proposing to waive clearing obligations for the kinds of contracts that are in dispute, which could prevent them from incurring new trading costs.
It was unclear, however, whether the latest proposal would be acceptable to all sides.
As Sven Giegold of Germany, a Green Party member who was at the December meeting, put it, "This question is now the deal breaker."