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Newedge welcomes EU derivative reform and highlights regulatory arbitrage risk with the US

Monday, August 30, 2010
Opalesque Industry Update – Newedge Group, a global leader in multi-asset brokerage and clearing, supports the European Commission’s legislative proposals to reform the OTC derivatives market, and recently submitted its comments to the Commission’s Public Consultation on Derivatives and Market Infrastructures.

Newedge has urged the Commission to harmonize the broad parameters of its future legislation with that of other jurisdictions around the world, particularly the US where private initiatives on OTC clearing are emerging in the wake of the US Dodd-Frank bill. This is critical if Europe is to avoid generating conditions that encourage regulatory arbitrage. Newedge largely supports the Dodd-Frank bill and continues to work with the principal regulators on the key provisions that remain to be discussed.

Nicolas Breteau, CEO of Newedge, said: “We believe that regulatory reform that promotes client clearing and exchange execution of OTC derivatives - when possible – is necessary to achieve lower systemic risk and at the same time allow derivatives to continue to play a useful role in the economy. The legislation in the EU and in the US alone would already benefit most participants of the global OTC markets – as more transparency should lead to lower spreads, higher liquidity and volumes benefiting both liquidity providers and liquidity takers – including end users.”

Newedge believes the proposals by the European Commission are generally consistent with the above principles, and in some cases explicitly support them. However, the Commission should consider including other key provisions, such as a prohibition against rule self-certification by CCPs, or a requirement that CCPs be open to buy-side participation through qualified brokers. The reform package requires absolute clarity on the role and governance of CCPs in order to be complete. Exemptions to central clearing are still being discussed in the US and any mismatch with similar exemptions in the EU is a potential source of significant international regulatory arbitrage. In both jurisdictions, Newedge supports end user exemptions for risk mitigation strategies for commercial enterprises, subject to a threshold, particularly adapted to the needs of small commodity producers.

Newedge also believes that the Commission (and all other global regulators) should discourage any clearing solutions that artificially exclude brokers from participation. The ICE Europe platform, as well as CME Clearport and IDCG in the United States and SGX AsiaClear in Singapore are all examples of robust clearing systems that permit broker participation which helps strengthen the clearing process, while providing buy-side clients non-dealer alternatives for execution and clearing.

Newedge also favors that OTC swaps, if clearable, be executed through transparent, central execution facilities, absent an extraordinary rationale. Centralized execution helps encourage better pricing and increased liquidity which is beneficial for end users of such products and helps facilitate position liquidations in default situations.

Newedge executes OTC derivatives on both an agency and principal basis, but always acts as a broker in such transactions, and not as a traditional dealer. Newedge has significant experience with respect to the centralized clearing of OTC derivatives. Newedge has been a member of CME ClearPort – which provides for the centralized clearing of OTC executed energy, metals, agricultural and FX swaps (pending) – since ClearPort’s formation in 2002. Newedge is a member of (a) most clearinghouses globally that provide OTC clearing services – including ICE Clear, the International Derivatives Clearinghouse, SGX AsiaClear and LCH (SwapClear) – as well as (b) the Swaps and Derivatives Market Association, the US Futures Industry Association, and the International Swaps and Derivatives Association.

(Press release)

Newedge Group, a 50/50 joint venture between Société Générale and Crédit Agricole CIB, is a major force in global multi-asset brokerage business, with a world-leading position in the execution and clearing of listed derivative products. With a presence more than 20 locations in 17 countries, Newedge offers a full range of clearing and execution services covering options and futures contracts for financial products and commodities, as well as for money market instruments, bonds, FX, equities, and commodities on OTC markets. Newedge provides a range of value added services, including prime brokerage, asset financing, an electronic platform for trading and order routing, cross margining, and the centralized reporting of client portfolios. Newedge, which primarily serves institutional clients, provides access to more than 85 exchanges. Newedge's 2,800+ employees form a close-knit, multinational team that can innovatively respond to its clients in fast-moving markets.


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