EUROPE - Dutch investment firm APG Asset Management has raised concerns about European Commission proposals to regulate derivatives, and warned additional costs could be added to trading if activity is required to go through exchanges or central clearing houses.
Gerben Everts, regulation and compliance officer at APG - which manages the assets of the ABP pension fund among others - was one of several respondents earlier this year to EC proposals to improve the safety of the derivatives markets.
He acknowledged that the regulation of derivatives seemed appropriate because these markets have in recent years becomemore important than regular markets, yet they remain largely unregulated considering the risks involved.
However, despite supporting the need for regulation, APG said it would dissuade the EC from forcing trades to be processed through exchanges through central clearing houses because while this might lower the counterparty risk that many investors suffered following the Lehman Brothers collapse, it could also increase costs simply derived from being required to use such platforms.
European pension funds have had to significantly review their derivatives arrangements since the events of last September, so any prospect of change could affect their processes and cost.
And in a comment to IPE, Everts said:" A mandatory requirement to trade on exchanges and through central clearing houses should not result in higher spreads. We are very much willing to compensate for the abolition of counterparty risk, but not for artificial costs created by non-competitive practices."
In APG's official response to proposals, Everts claimed that higher capital charges for financial institutions should be considered if they follow non-standardised contracts on a large scale. However, he also stressed any additional charges "must be reasonable, compensate for true risk, and not be a tool to force institutions to fit into a standardised approach, while [sic] this approach might not be fit for the specific contract".
The EC issued an update last month on future regulatory action for derivatives, which it said was designed to reduce counterparty risk in part by "substantially raising capital charges for bilaterally-cleared as compared with CCP-cleared transactions, and…mandate CCP-clearing for standardised contracts".
Another move proposed by the EC's Internal Markets Directorate suggested operational risk in derivatives trading could be reduced by encouraging the standardisation of legal terms on contracts and contracts-processing, even though until now many contracts have in many cases required individual terms.
One such move which might facilitate this, claimed the EC in its earlier consultation document, might be to regulate derivatives under the existing Markets in Financial Instruments Directive (MiFID).
But APG's Everts said "simply extending MiFID to derivatives would not be a good idea" as he believed MiFID's "best execution requirements have led to far more fragmented markets and consequently the erection of dark pools in order to facilitate large block trades".
He also told IPE: "This would neglect market reality of large professional institutions perfectly able to define their own terms as they see fit. A more balanced and careful approach is needed."
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