Royal Bank of Scotland announced today that it is winding down its OTC derivative activity,
Commenting on the RBS announcement, Jeremy Taylor, specialist in derivatives and operational processing, Rule Financial said:
“As the impact of over-the-counter (OTC) derivative regulation takes hold, the Royal Bank of Scotland’s scaling back operations is just the tip of a regulatory iceberg. With the Markets in Financial Instruments Directive (MIFID) II on the horizon, derivatives trading could become even more difficult for market participants.
“MIFID II will redefine what constitutes a derivative and the European Securities and Markets Agency (ESMA) must still undertake consultation and draft its technical standards later this year. Only then will the industry have a fuller understanding of what qualifies as a derivative, which could put it into conflict with the European Markets Infrastructure Regulation (EMIR) which were drafted based on the definition provided in MiFID I.
“There is a genuine danger that MIFID II could place further pressure on the OTC derivative markets in Europe for participants already operating under extreme balance-sheet pressure, low margins and reduced demand from customers for products to hedge risk. Caught up in European parliamentary elections, MIFID II is seen as an opportunity for candidates with an anti-banking agenda to increase support for their election chances. There is a concern that this will result in a draconian MIFID II that will stifle growth in the banking sector.
“RBS citing rising regulatory costs as a factor in its decision to wind down derivative operations demonstrates the financial impact of achieving compliance for the new rules. Banks have already invested millions in preparation for EMIR, if the regulators move the goalposts once more, they might have to pull the plug on derivative desks that are too expensive to operate.”
