Thursday, 3 March 2011

Will MEPs vote for amendments written by the derivatives lobby?

On March 7, the European Parliament's economic affairs committee will vote on amendments to the Commission's proposals to regulate one of the most controversial derivative financial products, Credit Default Swaps.

The London MEP Syed Kamall (European Conservative and Reformist group) has tabled 14 amendments that are identical to those tabled by Swedish MEP Olle Schmidt (Alliance of Liberals and Democrats for Europe) or have the same result in the legislation and/or the same explanation text (ten identical and four almost identical ones). [1]

Several MEPs from the European People’s Party – Markus Ferber, Burkhard Balz, Alfredo Pallone, Herbert Dorfmann and Corien Wortmann-Kool – and Sharon Bowles MEP (Liberal), who chairs the committee, have also tabled identical amendments either with Schmidt or Kamall and sometimes with both of them.

So, eight MEPs from different political groups and different countries have tabled tens of identical amendments. This heavily suggests that these amendments have come from outside of the Parliament, presumably from lobbyists for the derivatives industry.

In at least two cases, CEO has obtained text written by financial lobby groups which is identical with the amendments submitted by the MEPs.

The MEPs who have tabled these industry amendments appear to be working with industry to defeat the efforts of the rapporteur, Pascal Canfin, - to strengthen the regulation on credit default swaps and ban naked trading in CDS. These highly speculative financial products are widely recognised as having a destabilising role in the continuing Eurozone crisis. The Commission's proposal already lacks teeth, and if approved the amendments would undermine attempts to introduce even basic regulation and transparency in the derivatives industry.

For example, the amendments include:

1. Traders should give less accurate information about their position in the market [2]

2. They oppose trading venues publishing a daily summary of the volume of transactions [3]

3. Preserve the irresponsible practice of trading non-existing sovereign debt instruments (including naked CDS). [4] This amendment was emailed to MEPs by the Federation of European Securities Exchanges (FESE) but may have come from a number of lobbies as the financial industry shares common views on this.

Explanation: in the Commission's proposal, it says that in order to trade a product the trader should have an arrangement with a third party under which that third party has confirmed that the share or sovereign debt instrument has been located and reserved for lending. The amendment, which is identical to text emailed to MEPs by industry and tabled by six MEPs, says that it would be sufficient if the trader has a 'reasonable expectation' that the product he is selling can be located and reserved.

4. Postpone the establishment of any sanctions against traders who fail to settle their payments.[5]Identical text to these amendments has been sent by email to the MEPs by the European Central Securities Depositories Association (ESCDA). It may have come from some other financial lobby group, since many share these views. Schmidt’s office claims it didn’t receive this text from ESCDA.

Sharon Bowles explained that amendment 402 makes it clear that instead of deciding now on the sanctions, the EU should wait the advice of an industry expert group formed by the European Commission: the Harmonisation of Settlement Cycles Working Group (HSCWG which is a sub-group of the industry dominated CESAME 2). This matches with the position of the Federation European Securities Exchanges. This working party focuses on the competitiveness of the derivatives industry.

5. Further limit the scope for banning short selling as already provided for in only exceptional circumstances by the Commission’s proposal. [6]

Explanation: if this amendment goes through it will not be all naked CDS that will be prohibited in exceptional circumstances but only some of them. The justification of the amendment submitted by the MEPs say clearly: ''Powers to ban short selling in exceptional circumstances should be restricted to a defined set of financial instruments and to defined types of transactions in order to allow market participants to plan properly for the rapid implementation of emergency measures''

6. To introduce an automatic expiry for any ban of three months. This is how the amendment text reads: ''If the measure is not renewed after that three-month period, it shall automatically expire''[7]

7. Olle Schmidt goes as far as proposing a 20-year confidentiality clause for business or operational conditions [8]

You can find all the amendments here.

Olle Schmidt’s office told CEO that Schmidt had not met with ECSDA and that the amendments were not proposed by ECSDA. His assistant said he did meet with stakeholders and also the Swedish government.

“Mr Schmidt or me as his assistant did not meet ECSDA. Those amendments that you refer to were not proposed by ECSDA to mr Schmidt.’’ [9] He nevertheless failed to specify their origin saying that he “will not comment on specific amendments’’. On article 13 for instance he “has the same view as the Swedish government’’ which happens to agree with the derivatives lobby. [10]

MEP Schmidt’s office didn’t give a convincing explanation as to why 14 almost identical amendments were tabled both by Schmidt and Kamall. He only said that they had cooperated with ECR also among other political groups to prepare the amendments and that in some cases like Articles 6 and 12, ‘Mr Schmidt shares the same ideological point of view with Mr Kamall’.

They both seem to share the same ideological views as the Federation of European Securities Exchanges – which has the financial interests of its members to defend.

Syed Kamall declined to comment.

Last year a cross-party alliance of around 80 MEPs took an initiative to counter the ‘threat to democracy’ posed by the unopposed domination of financial lobbyists in the Parliament. Their colleagues in the Parliament should support them rather than siding with the stooges for the greedy and self-serving derivatives industry and vote down these amendments.

[1]Identical amendments Kamall - Schmidt: 1) 140 - 141, 2) 156 - 157, 3) 248 - 249, 4) 267 - 270, 5) 432 - 433, 6) 453 - 454, 7) 455 - 456, 8) 457 - 458, 9) 467 -468, 10) 481 - 482. Almost identical text with the same justification and / or the same result in the legislation: 11) 188 - 189 (fines or penalties not to be included in this legislative piece), 12) 337 - 338 (sovereign debt instruments out of the scope), 13) 441 - 442 (disclosure restricted to shares), 14) 485 - 486 (identical justification)
[2]Amendments 248, 249 by Kamall and Schmidt in Article 3
[3]Amendments 267 - 270 by Kamall, Schmidt, Ferber, Bowles and Wortmann-Kool in Article 6
[4]Amendments 351 - 355 by Kamall, Schmidt, Bowles, Pallone, Dorfmann and Woortman in Article 12
[5]Amendments 188, 189 by Kamall, Schmidt, Bowles in Recital 16, amendments 375 – 378 in Article 13 by Kamall, Ferber and Balz and amendments 402, 403 by Schmidt and Bowles
[6]Amendments 453, 454 by Kamall and Schmidt in Article 17
[7]Amendments 485 – 486 by Kamall and Schmidt in Article 20
[8]Amendment 502 in Article 29
[9]Email from Olle Schmidt's office, 28/02/2011 14:59
[10]Email from Olle Schmidt's office, 04/02/2011 12:48

(this posting has been updated on 07/03/2011)

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