Commission eases rules for controversial derivatives sector

The derivatives market was partly responsible for the financial collapse in 2007/2008 [Jonny White/ Flickr]

The European Commission today (4 April) presented various initiatives intended to temper regulation and cash requirements firms need to satisfy in order to trade sophisticated financial products, aimed at boosting the European economy.

The proposals will ease the reporting requirements for parties trading derivatives. The reduction of the administrative burden could save market players up to €2.6 billion in operational costs and up to €6.9 billion in one-off costs, the Commission estimated.

The EU executive will also extend exemptions for financial and non-financial counterparties when trading these derivatives, in regards to their clearing obligations.

EU rules to light up derivatives markets set for shaky start

New rules coming into force in Europe this week to shine more light on the $700 trillion (€513 trillion) derivatives markets will take years to produce a clearer picture of these complex products which were at the heart of the financial crisis.

Clearing is the post-trade activity aimed at reducing risks linked to the potential default of a counterparty by agreeing on a set of arrangements. It could include the intervention of a central counterparty as a guarantor of the transaction between both parties.

The proposal would also prolong pension fund exemptions from central clearing by three years.

The 2007-2008 crisis triggered a legislative offensive to rein in the derivatives industry.

Some of these products, in particular credit default swaps, were blamed for fuelling the financial meltdown.

But when Commission President Jean-Claude Juncker took over in 2014 he promised to strengthen Europe’s capital markets.

Commission presents piecemeal Capital Markets Union strategy

The European Commission unveiled on Wednesday (30 September) its strategy to strengthen capital markets in Europe, and thus reduce the “very high dependence on bank funding”, as President, Jean-Claude Juncker put it, when he took office last year.

Given the high dependence of the EU’s small companies and corporations on banking financing, and badly needed investment, the executive intended to increase investor participation in financing the European economy.

Part of the effort was a review of the thousands of pages of new regulation adopted after the crisis to facilitate the flow of cash to roads and bridges, but also to startups and growing firms.

Commission proposes new CCP financial rules

The European Commission has adopted a proposal on financial market infrastructure that aims to manage the risk of one or more parties defaulting on transactions, in an attempt to learn from lessons provided by the global financial crisis. EURACTIV’s partner Milano Finanza reports.

Commission Vice-President for Financial Stability Valdis Dombrovskis said that these reforms to the European Market Infrastructure Regulation, approved in 2012, are based on the results of the executive’s consultation with market forces and other parties looking at the “cumulative effect” of the new financial sector rules.

“Our proposal aims to reduce costs and reporting burden for Europe’s companies without compromising financial stability,” he said on today.

New rules to watch the City?

Britain’s exit from the EU has jeopardised the “key role” played by CCPs in the Europeans derivatives market.

“As many as 75% of euro-denominated interest rate derivatives are cleared in the UK,” Dombrovskis highlighted.

In order to provide clarity to the financial sector and businesses, the Commission will propose in June new legislation on CCPs.

In the upcoming proposal, the Commission wants to enhance the common EU supervisory arrangements for CCPs.

EU moving towards deal on derivatives crackdown

The European Union is moving closer to a deal on its derivatives crackdown that could risk confrontation with the US, which has warned it is straying from an agreed global approach.

It will also seek to ensure “effective supervisory arrangements for CCPs” based in third countries that clear substantial volumes of derivatives denominated in EU-currencies, and play a key systemic role for EU financial markets.

For these foreign CCPs, the Commission is considering two options: enhanced supervisory powers for EU authorities over third country entities or requesting those CCPs with systemic importance to be located in EU territory.

As a result, these intermediaries based in the City of London could end up being under stricter rules when trading euro-denominated derivatives.