Cross Atlantic Ties That Almost Bind: Technology Providers Have Woven the World's Exchanges into a Single Click-and-Trade Portal, but Trading Costs and Regulations Still Vary from Market to Market. However, This Summer Regulators in Europe and the United States Will Bring Long-Simmering Regulatory Convergence Talks to a Boil

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They're out there--in open forums and behind closed doors, top-level regulators from all sides of the Atlantic and Pacific have formally converged at least 12 times in the past two years. And that doesn't include countless informal get-togethers.

Their mission: to reduce regulatory barriers while promoting regulatory certainty around the world.

It's a tough line to walk, and for E.U. regulators, such meetings have special significance because the continent is struggling to implement the Markets in Financial Instruments Directive (Mifid), which is nothing less than a sweeping redefinition of its internal markets. As such, Mifid will have repercussions for brokers and traders on both sides of the ocean long after its measures are implemented.

Under the current timetable, member states have until the end of January to get their national laws into synch with Mifid (see for a detailed explanation of the Lamfalussy Process and Mifid, as well as other related links). Regulatory structures must be in place by November 2007.

Not everyone is convinced the deadlines will be met. Anthony Belchambers, chief executive of the U.K.'s Futures and Options Association (FOA), points out the European Securities Committee (ESC) still has to deliver its opinion on Mifid, and then the European Parliament will have a month to determine whether it feels the European Commission has overstepped its authority.


"It's a difficult directive with a nasty timetable," he says. "Each authority that makes up CESR (the Committee of European Securities Regulators, pronounced "Caesar") runs different kinds of financial services sectors." CESR, as the name implies, is an independent advisory body made up of securities regulators. Within Europe, its guidelines, though non-binding, are defining the shape of European regulation.

For its part, the European Commission is publishing a "Lamfalussy Scoreboard" to track the state of compliance of member states--and if that scorecard shows a critical mass of states off track for compliance late this year, you can expect a lobbying effort to get the deadlines extended.


Whatever the final implementation date, the reforms impact derivatives traders on several fronts--primarily by defining mandatory transparency requirements for over-the-counter (OTC) derivatives transactions and regulating commodity based transactions at an E.U. level for the first time in the continent's history.

"The tricky bit is to make sure the physical business underlying derivatives is not hit by banking rules," says Belchambers. "It comes down to definitions--and how you define the boundary between the physical space and the derivatives space."

CESR already has stated that physical forward contracts and spot deals should not be subject to derivatives regulation, but Jonathan Marsh, an attorney with Hunton & Williams in London, says one area of contention will be who is and who is not exempt from licensing requirements. Mifid states, for example, that undertakings whose main business is dealing in their own account in commodity derivatives won't have to become licensed provided they are not part of a group whose main business is the provision of investment or banking services. The application of this exemption will depend on what is meant by "main business," and even if firms fall within the exemption they should not get too comfortable as the continuing appropriateness of the exemption is to be reviewed after Mifid is implemented.

Marsh says U.S. firms dealing in European commodities may find themselves subject to regulations they didn't expect, depending on which European country they primarily do business in. "Mifid sets out a bare regulatory minimum," he says, adding, that if you are not careful, you may find that the business you do in Europe may suddenly require licensing, even if you don't have an office there. …