Welsh Conservatives in the European Parliament
Dr Kay Swinburne MEP

Citi - 20.05.11

Citi have asked me to speak on the topic of the EU's regulation of derivative products, including some background on "What is EMIR hoping to achieve?" and the role of the forthcoming MiFID review. After 2 years of working on the EMIR dossier and countless hours of meetings, discussions and negotiations on the minutiae including on the precise amount of capital a CCP should hold, who should have voting rights on the CCP's risk committee - and the ever important discussion over whether the final wording in the European Parliament report should read "should", "shall" or "may" – the EP ECON Committee will vote next Tuesday.
Despite the detail we have currently been embroiled in, the motivation behind EMIR is very clear - following the financial crisis of 2008 the G20 made a very strong commitment to mandate central clearing of OTC derivative products, asking that they be electronically traded where possible, in order to reduce the perceived risk these products pose to the global financial system.
The EU has taken that commitment very seriously, yet turning those short 2 lines into workable and efficient legislation over the past 2 years - while remaining coordinated internationally has not been easy.
We are still in the middle of the legislative process. 6 months ago, the European Commission came out with draft legislation on EMIR. Since then, the Parliament and the European Council, made up of the governments of the EU Member States, have been working in parallel to amend and improve the text. On Tuesday next week, the EP will vote on all of the different political groups amendments and come to one consolidated position that it will then use as a mandate for negotiation with the Council and Commission during a process called trialogue. Basically the Parliament, Council and Commission meet and negotiate, based upon their 3 texts and hopefully reach a common position, which ultimately becomes final legislation.
What I can tell you today about EMIR relates mostly to the Parliament's position which in itself is still subject to change depending on the outcome of the vote on Tuesday. And could be changed further still during the trialogue process.
EMIR is organised in 3 parts: firstly the clearing obligation which focuses on products, secondly the CCPs and what requirements they will have to adhere to, and thirdly trade repositories and reporting standards.
The clearing obligation will be imposed by the new European Securities and Markets authority, based upon a number of criteria, although the most important being systemic risk and liquidity. This obligation will apply to all financial counterparties.
There has been a lot of discussion over possible exemptions for different groups of derivatives users. The Commission's original proposal completely exempted public bodies such as governments themselves and international organisations like the BIS, and provided a very specific exemption for business end users of derivative products which the Parliament is attempting to further tighten by only exempting them from central clearing when the derivative product s directly linked to the hedging of commercial risk or treasury financing activity.
The Parliament has also sought special treatment for another category of user, namely pension funds. MEPS from the UK, Ireland, the Netherlands and Sweden, are very concerned that the already low performance of pension funds will be hugely hit by the cost of central clearing. Some risk aware funds have claimed that the cost of central cleaning being mandated could be as high of 1% - when they are only yielding a modest 4% annual return.
At a time when governments are raising retirement ages and coming under attack for fundamental changes to pension provisions, MEPs have sought not to exacerbate this problem. Yet many politicians, where the pension fund model is less well used, are still very concerned about opening up loop holes that less deserving market participants can exploit. As such, the current Parliament position will be to only require that pension funds use bilateral collateralisation and risk management techniques with a review built into the regulation that requires that in 3 years time the situation will be reviewed to see if CCPs have adapted to accept more types of collateral as margin - thereby reducing the cost for pension funds. The further safeguard on this special treatment is that it will only apply to funds designated under the EU directive on Institutional and Occupational Retirement Provisions and those that Member States law recognise as being used for retirement provision.
A key point related to collateral and the types of assets a CCP is willing to accept over and above cash. This I suspect is a key concern of the buy side here in the room. I have been approached by many funds - not just pension funds, worried about having to liquidate part of their portfolios in order to have access to cash to post as variation margin. The MEPs, working with the Rapporteurs, have sought to remedy this by requiring CCPs to accept cash, gold, government and highly liquid corporate bonds – of course this will mean appropriate haircuts being applied - and should be applied without distinguishing between initial and variation margin. However, I am not certain that this will be retained in the final version as currently CCPs are making it know through MEPs, Member States, at the Council and the Commission that they do not believe that their models can accommodate this broader definition for variation margin. Personally, I believe that this model will adapt over time, especially if the buy side collectively puts pressure on both their clearing members and the CCPs directly – in the meantime, the European Parliament stance at this stage in the legislation will hopefully give CCPs and their members a push in the right direction to find appropriate solutions.
I find it very frustrating that what I would consider key buy side issues have been slow to come to the fore of the EMIR discussion. There are certain technical issues that would have benefitted from the industry being more pro-active earlier on. Explaining your specific needs to the Commission before legislation is proposed rather than fighting to amend it later in the process. The prime example of this is segregation. The Commission's proposal was vague and gave little protection to the investor. Rightly this has caused some buy side firms to react, although many have now left the impression that all buy-side firms are demanding full segregation of individual client accounts – in turn this has been interpreted by many MEPs as a call for a mandatory system of full client segregation regardless of cost although we have finally negotiated the potential to opt out. I am a firm believer in client choice. In my view, one not currently shared more broadly, the CCP should have to provide the possibility for full segregated client accounts, but in many cases an omnibus account with legal segregation may be enough - why should everyone bear the cost of an extra layer of protection that they may not need nor desire?
Yet arguing the finer points of segregation and the different technical legal terms involved is not easy amongst politicians - it is a clear area of difference between the legislative process in the US and the EU. In the US the politicians set the principles and the experts, such as CFTC and SEC, deal with the details - this is not the way in Europe - here the politicians do the detail.
Segregation is probably one of my biggest concerns when it comes to the outcome of EMIR as it is the most uncertain - when we start from a poorly defined proposal from the Commission on such a technical subject, it is hard for us as politicians without tech expertise to improve on it.
The further point that hasn't received much buy side attention is their representation on the governorship of CCPS themselves. While you access the CCPS via your clearing member and so as a general rule don't interact directly with them, now that you are going to be forced to use CCPS it makes sense that you get more involved in how they are run. It may not always be the case that the buy side's interests are completely inline with their clearing member. As such, I have fought successfully within the parliament for the mandatory inclusion of the clients of clearing members to sit on the governing board of CCPs, and that they also be represented appropriately on the risk committee of the CCP.
The final issue on EMIR that I am concerned about which will certainly drag on until the very last negotiation session, is that of recognition and access to 3rd country CCPs. For me, this is a key problem that has no easy solution. Fundamentally, we don't want to weaken EU markets by allowing access to CCPs with lower risk management standards than our own, yet we do not want to raise the walls and create fortress Europe.
What makes things slightly easier here than in other directives facing this issue, is the G20 commitment - as all of the largest markets in the world have signed up to doing something similar, one can only hope that an equivalence regime of some kind will be possible - and the way in which the EU and the US have been coordinating particularly on derivatives reforms makes me very optimistic - we see Gary Gensler in the Parliament almost as much as Commissioner Barnier! Yet I worry about the Asian markets and whether the US will really live up to all of its promises. The best thing I think the EU can do at this point is allow enough flexibility in its rules to accommodate changes that take place internationally - and not set it stone positions that can not be changed later.
EMIR has been all about clearing and reporting, so I’ll now turn to the second half of the EU's process on derivatives reforms – namely MiFID - which will deal with the trading of derivatives products.
MiFID is at a much earlier stage in the legislative process than EMIR - the Commission came out with a consultation paper just before Christmas and we expect draft legislation before the end of the summer - so we only have an indication of what it will contain - although we know it will be much wider than just derivatives trading, covering a review of the equity markets, fixed income space, commodities, PRIPS as well as the G20 derivatives commitments.
As the US is so much further ahead than the EU in the area of derivative trading it is only natural that developments there have shaped discussions in Europe. The creation of the concept of an American Swap Execution Facility has naturally led to questions over whether we also need to create an equivalent European Swap Exchange Facility. Bearing in mind that in the EU we already have trading platforms set up as MTFs for the purpose of trading many different asset classes including derivatives, I , and the European Commission agree that this is, in fact, not necessary. With a few adjustments to allow for less liquidity and voice trading the MTF category could, in my opinion, be used as a template for this new type of trading.
In order to capture this, the Commission in its consultation on the MiFID Review, has proposed the creation of a new trading platform acronym - an OTF -or Organised Trading Facility. The idea behind this is to capture the many different types of trading venue out there and open them up to the regulatory scrutiny, without losing the necessary flexibility in the market.
The actual wording of the G20 commitment of encouraging trading onto electronic markets where appropriate, as opposed to encouraging trading onto exchanges is what this new definition is in answer to. While it is generally acknowledged that trading on an exchange or alternative trading venue provides the most transparency to the market, the burdens and limitations of liquidity and the specifications of each asset class also have to be accepted and acted upon. For this reason I think the OTF category will allow the market enough flexibility to come up with new, more transparent ways of trading that will satisfy the needs of regulators and the wider public, in the area of transparency. While the Commission has come under some criticism for not providing a more strict structure for the OTF definition, this is precisely why I think it can be made to work.
The most important message I would like to give today is that non of the things mentioned are set in stone although EMIR is well advanced, the MiFID review timing means that there are many opportunities for market participants to interact and shape the legislation along the way and I would urge you all to use this time productively, finding solutions to the many issues that will be posed. I look forward to your involvement, and am happy to take questions.
Join Our Mailing List Get in Touch
Welsh Conservatives

The European Commission has today designated European Protected Geographical Indication (PGI) status to the well-known Pembrokeshire Early Potato from West Wales.
The Pembrokeshire Early Potato was one of only three quality farm products whose applications for PGI status were approved today.
The EU PGI schemes protect product names against misuse and under these schemes more than 1200 products are already protected.
Commenting on this announcement from the European Commission today Dr Kay Swinburne MEP – who is from West Wales - said:
"I am delighted to see that this application to have "Pembrokeshire Earlies" added to the register of PGI products has been approved by the European Commission today."

"Achieving this prestigious status is a clear acknowledgment of the high-quality and distinctive produce we continue to deliver in Wales. Pembrokeshire Early Potatoes thoroughly deserve their place alongside the well-known food and drink products from right across the EU which already feature on the PGI register."


Kay was delighted to host an event to celebrate Higher Education, Science and Innovation in Wales last night in the European Parliament.  The event builds on the British Council’s “Strategic Analysis of the Welsh Higher Education Sector, Distinctive Assets”.  A number of experts spoke to share their views of Welsh HE at the event and how it can develop in the future.

In advance of the 'Fox-Hafner Report' vote on the single seat for the European Parliament, Kay and the other UK Conservative MEPs feel it is right to draw attention to the fact that the seven-year cost of the dual-seat arrangement comes to £928,000,000. Since her election to the European Parliament in 2009, Kay has strongly supported bringing the monthly Parliamentary meetings in Strasbourg to an end and therefore saving taxpayers a considerable sum of money.


Kay was delighted to meet Malala Yousafzai, who was awarded the EU's Sakharov Human Rights Prize at the European Parliament today.

Following Malala’s speech to the European Parliament, Kay said, “What an inspirational speech Malala gave to the Members of the European Parliament today. As a mother of young children myself, I hope that they can also aspire to achieve like her. Malala is an exceptional young lady who has overcome adversity by tremendous force of character and a passionate belief in the right of everybody to enjoy and benefit from education.”   


Kay was very pleased to meet with members of the Advanced Manufacturing Research Group at the European Parliament in Brussels, one of four groups set up in key Welsh research strengths to engage with EU research funds. The delegation visiting Brussels included representatives from Cardiff University, Bangor University, Swansea University and Trinity St.Davids University.

In advance of tomorrow's European Council meeting of leaders, Dr Swinburne has echoed the recommendations made in a recent report published by a number of business leaders, which highlights the importance of removing barriers to business competitiveness in Europe and getting rid of burdensome legislation by cutting EU red tape.

Last year Dr Swinburne encouraged businesses in Wales to highlight to the European Commission which over-burdensome regulations they would like to see slashed, by writing to small businesses all over Wales and asking them to tell her their red-tape problems.

Electronic cigarettes no longer face being taken off the shelves by the EU after Conservative MEPs were successful today in amending EU legislation on tobacco labelling.

Conservative MEP's led the amendment to defeat proposals that would have classified e-cigarettes as medicinal products, meaning they would have to undergo an overly burdensome and costly authorisation procedure, which would go beyond the procedures for traditional tobacco products... (Read more under 'Articles')



Welsh Conservative MEP Kay Swinburne has been sitting down with leaders in Europe's biotech field to choose the top five candidates to compete in this year's EuropaBio Most Innovative EU Biotech SME Award.

As a member of this year's judging committee, Kay is once again supporting the EuropaBio award, which has attracted applications from all three sectors of biotechnology - healthcare, industrial and agricultural, from across the EU... (Read more under 'Articles')


WELSH Conservative MEP Dr Kay Swinburne today hailed a vote in the European Parliament as a "wake-up call" in the battle to save Europe's endangered languages.

MEPs meeting in Strasbourg backed a report which calls on governments across the EU to develop action plans to encourage continued linguistic diversity.

The report, written by Corsican MEP François Alfonsi, also says governments should be "more attentive" to threats which may lead to languages becoming extinct.

Dr Swinburne, who was a shadow rapporteur for the report, has argued that Welsh can be seen as a positive example of language revitalisation which communities across the EU should follow... (Read more under 'Articles')

Contact Us
Dr Kay Swinburne MEP
Rhumney House
Copse Walk
Cardiff Gate Business Park
CF23 8RB

Tel: 029 2054 0895

National Political Party: Conservative Party
European Group: European Conservatives and Reformists Group (ECR)

European Conservative and Conformist Group
© Copyright Kay Swinburne 2013 | All rights reserved. | Photographs of the Parliament supplied by Adam Issacs.

Website design in Cardiff by Designer Websites Ltd