With the Markets in Financial Instruments Directive (MiFID II) lurking on the horizon, Taylor emphasised that market participants will find derivatives trading increasingly difficult.
"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."
Taylor proposes that "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."
Regulatory costs lie behind the decision taken by RBS and across the board "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."
The above commentary from Jeremy Taylor was featured in an article published by FTSE Global Markets, on 19 May 2014.