The European Market Infrastructure Directive will focus on reducing risks between the two sides of a share and derivatives transaction so that fallout from default is ringfenced.
The European Commission has already announced broad plans for new rules, but details are now emerging on content and timing. It wants the new law to take effect from the end of 2012 - an ambitious deadline for such a sweeping law, the sources said.
In October, the Commission outlined future plans for ensuring a more efficient and safer derivatives market, saying its initiative marked "a paradigm shift from the traditional view that derivatives are are financial instruments for professional use and thus require only light-handed regulation" (EurActiv 20/10/09).
The Commission's move is part of global efforts led by the G20 group of countries to apply lessons from the credit crunch by shining a regulatory light on hitherto opaque parts of the market such as derivatives.
A spokesman for EU Internal Market Commissioner Charlie McCreevy had no comment on the plans for a draft law, saying it was a matter for the incoming Commission.
Former French Foreign Minister Michel Barnier, whose country traditionally takes a hard line on financial regulation, is expected to take charge of EU financial services in the new Commission that is now being put together.
The bloc's financial industry already faces a welter of draft EU rules now being adopted, ranging from hedge fund registration to tougher bank capital requirements and fundamental changes to supervison.
Amendments to the bloc's MiFID securities trading rules and the extension of its market abuse rules to cover derivatives are also expected in 2010.
The market infrastructure rules will extend the EU's reach deep into the post-trading arena of clearing, settlement, and in the case of derivatives, mandate reporting of off-exchange traded contracts to a repository, the sources said.
The Commission negotiated a voluntary industry code of conduct to boost competition in clearing but it has had mixed results in increasing user choice.
Britain, the bloc's biggest financial trading centre for shares and derivatives, has already called for new EU rules on clearing to make the system safer.
A pledge by the G20 to require as many off-exchange traded derivatives contracts as possible to be centrally cleared has highlighted the need for adequate governance and default funds among clearers, who will become far more systemically important in future.
Central clearing of credit default swaps, a derivatives contract found at the heart of the financial crisis, has begun in Europe and the United States but policymakers worry the existing supervisory regime is inadequate for the sector.
The new rules will set out how clearing houses like LCH.Clearnet and Eurex Clearing must be directly authorised and supervised. It will also look at capital requirements and fees.
Industry sources said the draft law is also expected to ensure users can have a choice of clearing and settlement house. The new rules will also likely guide how operators decide if a derivatives contract is clearable. Contracts not cleared are set to face a higher capital charge.
The draft law is also expected to include settlement houses within its scope, though the impact may be smaller as the European Central Bank is building a single European settlement system for securities trades by 2013 to cut costs.
(EurActiv with Reuters.)