Bureaucrats and bankers rarely make the easiest of companions. But in Europe, they are proving to be a combustible combination amid efforts to agree a clearing mechanism for the over-the-counter credit default swaps markets.
It has been less than three months since the European Commission and European Central Bank called on dealers in the credit derivatives world, exchanges and clearers to commit to creating a "European solution" for the clearing of CDS.
The move followed a similar initiative in the US, where concern over counterparty risk after the Lehman collapse has led to a push by the New York Federal Reserve to get OTC CDS clearing off the ground as soon as possible. Yesterday, the Depository Trust & Clearing Corporation, the US clearer and settlement system, said it would support all four US proposed solutions to the problem. According to the DTCC, notional CDS volumes outstanding have shrunk to less than $30,000bn. The DTCC is central to the effort since its "trade information warehouse" is the central registry for confirmed CDS trades.
But in Europe, Brussels has failed to achieve a commitment from a sufficient number of dealers for a timetable for getting a European clearing solution for the CDS market off the ground by June - and the effort has hit a roadblock.
Brussels wants a solution in Europe. Officials are not convinced that European regulators would be able to intervene in a situation where a US clearing house ran into difficulties, given that the clearing house would be subject to US jurisdiction. As one Brussels official puts it: "Can we afford the luxury of having a CCP clearing the whole world, over which we have no regulatory and supervisory powers or guaranteed access to information? And what if it goes belly up?"
Yet dealer banks are reluctant to be forced into signing up for a European solution. They are in favour of shifting CDS contracts that can be cleared onto a CCP, but prefer a "global" solution - wherever that is based.
Anthony Belchambers, chief executive of the Futures and Options Association, says: "The Commission's call for a strictly EU CCP solution to clear EU CDSs seems out of step. It may be a preferred solution - and I understand that - but it is the quality and cost of the clearing solution that matters most - not its location."
The International Swaps and Derivatives Association says it is "committed to continuing to work with regulators on both sides of the Atlantic as we move forward with developing risk management solutions that meet regulatory needs on a global basis."
But its constituents balk at the operational issues they claim must be clarified before any commitments can be made. They also argue that having too many CCPs would be costly.
Commission officials are furious. As they see it, having one CCP functioning globally would be more risky from a systemic perspective than having two. And, they argue, having more than one would spur competition between providers.
The choice by EU internal markets commissioner Charlie McCreevy of an endDecember date for "concrete proposals" on how a clearing structure might work was always going to be tight. But Brussels hoped there was sufficient appetite within the industry for the changes to make this achievable.
Clearly, with parliamentary elections looming in June, a later spring date was never going to be taken seriously.
And if industry enthusiasm existed, officials seem to have reasoned that picking between December and February, say, was unlikely to make much difference.
In fact, the ambitious timetable almost worked: there were commitments from many of the players involved. However, key parties - notably Isda - hung back.
To Commission eyes, some of the arguments being presented by the industry have a frustrating resonance: similar arguments have been raised in respect of regulation of credit rating agencies. However, while acknowledging that it is sensible to have systems that are compatible internationally, Brussels has also defended its right to set standards for the EU, and to lead internationally if necessary.
Where the stand-off with dealer banks leaves Brussels is less clear. There has been talk of some form of legislation or regulation. But doing anything in the few months left for the current parliament seems virtually impossible.
Still, one official insists: "Never underestimate bureaucrats' creativity and foresight."
Groups preparing to clear contracts
*IntercontinentalExchange and the Clearing Corporation, a consortium of dealer banks
*CME Group and Citadel, a Chicago-based hedge fund
*NYSE Euronext, whose effort is proceeding under the umbrella of Bclear, the trade registration and processing unit of Liffe, the group's futures arm, and LCH.Clearnet
*Eurex Clearing, a subsidiary of Deutsche Börse