This blog entry is not for those who prefer to learn more about Archie and his evenings in the pub. I will return to that….
My preoccupation with the European Commission (EC) and its thinking on the regulation of OTC derivatives ratcheted up a gear dramatically today. The EC seems to be inching towards acceptance that there must be an exemption for corporates – thereby preserving the ability of most if not all to go about their business of mitigating risk without having to cash collateralise.
It is now clear that the EC is struggling with the basis for such an exemption but seems to accept that it would be foolhardy to do so on the basis of accounting treatment (yesterday’s blog….). The EC is talking about ‘thresholds of intervention’ and whilst some of the largest corporates may fear this, my own view is that such an approach could be workable. It has the huge attraction of requiring the regulators to be proactive in their monitoring – not a bad thing, you might feel, given how many were asleep on their watch in the run-up to the financial crisis.
An EC internal document that seems to be widely available today everywhere other than on their own website contains some thinking that looks – at least on first reading – to be fuzzy in its use of data and in the understanding of the role that derivatives play for corporates (not for liquidity but rather for risk mitigation). However on first reading I welcome its overall direction. There is cursory reference to the elephant in the room that still remains – the pressure on Basel / the BIS to raise punitive capital requirements on bilateral OTC transactions – but we know that battle still has to be fought.
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