London - European regulators should be able to get legislation in place by the Group of 20's end-2012 deadline for regulating the massive OTC markets, but top officials said there were a number of critical issues still to be worked out.

The most important issue, they said, was ensuring that implementation was consistent with regulatory frameworks being established in the United States and elsewhere. "In terms of getting legislation in place, you could say that things are broadly on track to get us to the end of the year and meet the G20 commitment to have proposals in place," said David Bailey, acting head of Market Infrastructure & Policy at the UK's Financial Services Authority.

"But that's only part of the story," he told a TradeTech conference. "We have market participants who have actually to meet the requirements that we as regulators and as legislators are setting, and that's the difficult bit. And there are 1,000 unanswered questions that we need to get to."

In practice, regulators say, that means the implementation of the G20 requirements for OTC derivatives will spread out well beyond the end of 2012.

"This is not a simple task. The amount of debate that's taken place in the last 2-1/2 to 3 years has certainly made it extremely clear that we're dealing with complex issues and we need to get them right," Bailey said. "And there's no point rushing and implementing the wrong rules or implementing them in a way which is going to harm the overall objectives that we're trying to achieve and that the G20 set us."

The most important of the issues still needing to be tackled, he continued, is how to achieve cross-border consistency. "If we don't place consistent rules we'll create the opportunity for conflicts between rules, overlaps between rules and gaps between rules. Business will simply shift around to take advantage."

Patrick Pearson, Head of Financial Markets Infrastructure at the European Commission, echoed that point: the "one missing piece of the puzzle" he said was the cross-border aspect of Dodd-Frank, specifically section 722D. The litmus test will be how the United States requirements apply to firms located in the UK and doing business in the UK, both U.S. and non-U.S. firms. "That is absolutely critical," Pearson said. "The last thing we want," he added, "is for European companies to be subject to conflicting requirements, legal uncertainty and extra cost."

Other issues that Bailey said needed to be resolved included capital and margin requirements for non-cleared trades and capital charges for exposures to central clearing parties.

Regulatory clock is ticking

Pearson laid out a tight timetable for the audience, many of whom will be directly affected by the final rules agreed.

"ESMA is now working very very hard on 20 draft technical standards that need to be sent to us at the European Commission by September 30 at the latest. That's 58 working days from now," Pearson said, noting that three of those standards concerning risk mitigation for non-cleared derivatives, margin requirements for non-cleared derivatives and interoperability requirements, would not be subject to that deadline.

He said draft standards would soon be released and there would be a public hearing on them on July 12. "And you will have until the 3rd of August to get your comments to ESMA for all those draft regulatory standards," Pearson said.

By September 24th, authorities will meet in Paris to sign off on the draft standards, after which they will be sent to the Commission. "Then we have 3 months, minus all the public holidays. We will need to translate these draft standards into law," Pearson said. "So time is short. Time is really short."