Welsh Conservatives in the European Parliament
Dr Kay Swinburne MEP

Tradetech FX, London, 25.09.12

I have previously described the foreign exchange markets, the largest by trading volume, as the elephant in the room. As very often they are not explicitly discussed in the formulation of financial market legislation. However, identifying three areas in which regulation is going to affect the FX markets and how you will trade is not difficult - EMIR, MiFID and extra territoriality are probably the three most topical. However all three open up huge topics of discussion and within them there are many aspects that you should be aware of. Whereas historically the FX markets have been left for self-regulation, especially in the advent of CLS Bank, in a post-financial crisis era no asset class or product is outside of the new rules. Where possible, both the EU and the US, and other jurisdictions, have assured practitioners of specialised treatment for the FX markets, yet this all happens within a horizontal framework that aims to be all encompassing.

The first thing I would like to point out is that many of the issues I am going to talk about today are yet to be finalised, in fact all three areas; EMIR, MiFID and Extra-territoriality are in different stages of the legislative process. EMIR has had political agreement and the more detailed level 2 rules are due out at the end of this month, MiFID is still under intense political discussion within both the Parliament and the Council, so is still quite a long way from certainty how certain issues will end up being dealt with. And the problems of extra territoriality or the third country issue as we call it in the EU, are coming to a head as the first version of the CFTC's draft rules were released over the summer and have received widespread criticism and in some areas condemnation by all significant global regulators.
To start with the piece of legislation that is the most developed, EMIR deals with the trade reporting of all derivative products, fulfilling the G20 commitment around the mandatory central clearing of all eligible derivative products, rules surrounding those products that cannot be centrally cleared and the prudential requirements fro CCPs and Trade Repositories.
Firstly, to address one common misconception I have heard in the media and along the corridors in Brussels, FX is not exempt from EMIR. All products across all asset classes will have to be reported to a trade repository. Given one of the main issues for regulators and market participants during the crisis was a lack of information about the interconnections between counterparties and precisely who was exposed to whom, it does not seem logical to exclude one of the largest markets in the world from this basic requirement. However, the central point of the G20 commitment around central clearing of derivatives is less clear cut. Within EMIR, the political process recognised that while central clearing deals with counterparty credit risk, it does not address settlement risk. Given that in most cases in the FX market, most contracts settle quickly, the appropriateness of central clearing for them has been questioned. However, as I previously stated, EMIR is supposed to be a horizontal piece of legislation that address all asset classes, therefore nowhere will you find an explicit exemption for FX from central clearing.
In the article that deals with the conditions that need to be met for a derivative to be deemed eligible for mandatory central clearing, settlement risk is one of the criteria that needs to be evaluated as well as global convergence. In practical terms this gives ESMA the tools necessary to not apply the clearing obligation to most FX contracts, except perhaps long dated derivative contracts. This is in line with the way US regulators have announced they will treat FX. At the same time it gives European regulators the flexibility to apply the obligation should the situation change.
I realise that the market would have preferred a more clear cut approach to the FX markets, however EU legislation is often a compromise between many different political groups within the Parliament and between the 27 Member States that make up the Council, and a straight forward exemption was not deemed appropriate by some parties.
However, unlike in the US, where the CFTC and SEC have been given a very wide mandate to write rules based upon Dodd-Frank, ESMA and the European commission have a much tighter straitjacket within which to operate.
ESMA is not allowed to have any discretionary power and all of the rules it writes have to be tightly defined within the original political text - or level 1 as it is known. This means the content of level 2, the delegated acts that ESMA writes, is then closely monitored and scrutinised by both the Parliament and the Member States in Council. We have the power to reject any rule that we feel is not in line with what was agreed at level 1. For this reason, the Parliament has commented upon the consultation that ESMA released at the start of the summer on their initial plans for delegated acts, making clear what the political intent was when the agreement was made so ESMA could adjust its work, and lessen the chances that we reject their standards.
One area that I am most concerned about for the FX markets is that of "backloading". At one point in the initial legislative process it was argued that EMIR should be able to retroactively apply to contracts that have already been entered into - back ad infinitum. Given the volumes involved in the FX market and the tight margins that both financial and non-financial market participants operate under, the idea that you would have to go back and centrally clear contracts retrospectively is unacceptable to me - the margin involved would be enormous. While some in the EU political process argued that the clearing obligation should apply from the date of entry into force of EMIR, as there should be a reasonable expectation that a product might at some point be required to be cleared, this was not the majority view as the idea that banks would be able to price this into a product, increasing costs across the board, for something that might never happen, was unacceptable. The political agreement that was reached agreed was clear. The legislation can only apply back to the point at which a CCP informs ESMA that it is able to centrally clear a product - no further.
I have heard rumours from regulators and market participants that ESMA is considering a technical way of getting around this provision in the text. There was no ambiguity in the final political agreement concerning the retroactive application of EMIR, and should ESMA or the commission attempt to circumvent the co-legislative process, they should expect that the Parliament will fully exercise its right of scrutiny and send them back to the drawing board.
Not all areas are quite so clear cut, so we are all waiting with anticipation for ESMA's draft technical standards to come out at the end of this month. I have a lot of concerns for FX transactions and the rules concerning how trades which are bilaterally cleared will end up being treated. Given the regulation's objective to encourage central clearing by making it more expensive to bilaterally clear contracts, if this same logic is applied to the FX markets, that are in many cases structurally unsuitable for central clearing, it would seem inappropriate to include them in these provisions - however it is an area of uncertainty that will be cleared up in the coming weeks.
MiFID is in a much earlier state and so details like this are yet to be discussed. We are still in the high level politics of deciding whether HFT is good or bad, whether we should hard wire position limits for all commodity derivatives in Europe and whether all inducements on retail investment products should be banned.
MiFID 2 is a huge dossier, covering a lot more than the areas that are of concern at this conference. Investor protection, issues including the extension of MIFID rules on trading pre and post trade transparency and reporting on all asset classes, corporate governance, HFT, market infrastructure, business conduct rules, the G20 commitment on the trading of derivatives - the list continues.
However, today is a very opportune moment to be discussing the state of play with this file as tomorrow the Parliament will vote on the 2000 amendments that have been tabled to the Commission's proposal that was released this time last year.
To give you a little background on the process, and explain why the views of the MEPs matter, I will just explain quickly how the EU legislative process works - apologies to those of you who know this only too well. In brief, after a consultation process, the European Commission produces a draft piece of legislation. At this point the European Parliament appoints one MEP to lead their approach to the proposal, in the case of MiFID this is a German MEP who is from the largest group in the Parliament, the centre right EPP (Mr Markus Ferber). He then drafts his views on the Commission's proposal, amending it accordingly. Then all of the other MEPs on the committee submit amendments individually to the Commission's proposal. Each MEP appoints one member as shadow Rapporteur to coordinate this process, aiming to streamline the views of their group. I am the ECR group's shadow Rapporteur and have worked with my colleagues Ashley Fox and Syed Kamall on areas they have special expertise in, such as corporate governance and retail investment products.
The next stage in the process saw Mr Ferber scrutinise all of the amendments submitted and aim to come up with a single compromise text that brings diverse political views towards a consensus position. At that point all of the shadow Rapporteurs begin a negotiation process over these compromises in order to fight for their amendments. This process ended very late last Tuesday night, with the Rapporteur deciding he now has enough political support for all of his compromises to go to a full vote in committee - this is the vote that will happen tomorrow.
This text as amended by committee tomorrow then forms the basis of the Parliament's position in the next stage of co-decision. In parallel to the work of the MEPs, the council, made up of the 27 Member States undergoes a similar procedure, also amending and negotiating the Commission text until they can come to what is called a General Approach, although they are a little behind the Parliament and aren't expected to reach this until November at the earliest.
When these two texts have been agreed, the three institutions, Parliament, Council and Commission come together in a trialogue, to negotiate one final text that will ultimately become legislation. This can take a long time if the parties are far apart. In the case of MiFID, I think there will be a lot of agreement between us as the Commission has produced a good proposal to start with, however the sheer size and the number of issues that we will have to discuss means that this could take quite a while.
The specific content of MiFID II that should be of concern for the FX markets is the expansion of pre and post trade transparency requirements from equities to all non-equity markets, the formulation of new trading venues and how the market structure will look going forwards, provisions around HFT and a few curve balls that the Parliament has added into its text, like an obligation to trade all products on either an exchange, an MTF or an SI, and a requirement to centrally clear all products that are traded on an exchange or MTF - which may or may not make it through tomorrow's voting session.
The initial commission proposal would have required pre trade transparency in all products - much the same as MiFID I brought in for equities. The Parliament has adjusted this, proposing a criteria based upon liquidity for bonds and structured products and only applying it to derivatives that are subject to the electronic trading obligation. Given that electronic trading will only be applicable to those products which are subject to the mandatory clearing under EMIR and even then, subject to a liquidity threshold, I am confident that this should preclude a pre-trade transparency obligation in most FX products. However this is of course the Parliament's position, going into negotiations with Council we may still face some resistance.
This tailoring of the pre trade transparency regime came at the price of more post trade transparency which will be calibrated by product size and type, so should be flexible enough to take account of the specificities of the FX market.
This increased transparency may open up new markets to more high frequency trading strategies, therefore new obligations and rules regarding HFT will apply to all venues, not just in the equity markets.
The Parliament is proposing what I consider to be sensible precautionary measures in the area of market infrastructure, including coordinated circuit breakers across all venues, a requirement for a fee structure that charges more for high order to cancellation ratios, an agreement between venues and high frequency trading firms providing liquidity about market making obligations as well as rules governing direct unfiltered market access. I think these measures should be seen as a necessary regulatory response for keeping up with the explosion of technology in the past few years. On the other hand, the Parliament is also likely to vote tomorrow to include a 500 millisecond minimum resting period on all venues in all products. Personally, I will be voting against this measure as I think it will increase costs for all market users, not just HFT firms and it will not do anything to create a more level playing field as the HFT firms will still be the first in line after the 500 milliseconds have passed. However I suspect that I will be in the minority tomorrow.
MiFID has a long way to go through the legislative process so I hope that issues like this will receive full debate and scrutiny before any of them are passed into law. Given the timetable we are working to at the moment, I do not think it is likely that there will be a final political agreement before this time next year. This will then be followed by at least 6 months of rule making, meaning that the earliest MiFID 2 is likely to come into effect will be the start of 2015.
More so than in any other market, international cooperation and convergence is of the utmost importance with the FX markets - by definition they are cross border and cover multiple jurisdictions. And in the most part, as I have already alluded earlier in my speech, I think we are heading towards similar provisions in both the US and EU and most likely in the Asian jurisdictions as well. However it is unrealistic to think that we will end up with identical rules in all jurisdictions. While the G20 reached agreement on principles concerning derivative products it did not go into the detail of how precisely to get there. There are genuine structural differences in different national markets - what works in one jurisdiction will not necessarily work in another, therefore we should be aiming for all of the different regimes to fit together - not overlap and give market participants two sets of conflicting rules to follow.
This is why the CFTC's draft rules that were released earlier this year give me huge cause for concern. Extraterritoriality has been discussed for a long time, yet these rules take the debate back to directly after the financial crisis when many commentators were talking about protectionist tendencies and the possibility of a trade war. While the CFTC's goal of ensuring that there are no obvious regulatory loopholes for market participants to base themselves off shore and thereby avoid the new rules is mirrored by the EU, the idea that the solution is for the CFTC's rules to apply to any contract with any vague connection to their very wide definition of a "US person" even when another G20 jurisdictions rules apply, is hugely problematic. It's also concerning that the CFTC is proposing a different definition of what a US person is to what the SEC is proposing - particularly when they are supposed to be regulating in the same space.
The CFTC is going to have to recognise that its concept of substituted compliance - what we in Europe term "effective equivalence" within our regulation has to be workable. We have spent a lot of time ensuring that EMIR is suitable for European markets and assume the CFTC has done the same for the US - we should be looking to ensure that they are compatible, not competitive.
It would be hugely disappointing if the drive towards global financial regulation falls at this final hurdle.
In the past few years two things have driven change in the markets, technology and regulation, as you have heard from my speech, it is not over yet. There is a lot more regulation in the pipeline that will affect you going forwards. I urge you to work with your trade bodies and make sure that your views are heard within the EU legislative process. It is consultative and interactive all of the way through to final implementation, so make sure that your views are heard by either the FSA, the UK government, or approach European Parliamentarians like myself, or even the European Commission or ESMA directly for level 2 implementation. Above all else, I would like to see fair and efficient markets that allow companies to raise capital and help revitalise the rest of the economy.
The global financial markets need to remain just that - 'global' and individual legislators and regulators need to trust comparable system in order to improve systemic risk management on a worldwide basis.
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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')

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