The European Commission presented proposals last Friday (3 July) to strengthen the safety of EU derivatives markets, suggesting that dealers in Europe will be given more flexibility than their US counterparts amid mounting pressure for stricter regulation in the aftermath of the financial crisis.
EU Internal Market Commissioner Charlie McCreevy based his proposals on the principle that derivatives should be exchanged in a safer way, but not in exchange houses as proposed by the Obama administration in Washington.
The United States is seeking to go beyond centrally clearing over-the-counter (OTC) trades by shifting trading onto exchanges or trading platforms where possible.
McCreevy’s proposals, however, involve the establishment of central counterparty clearing (CCP) in order to offset some of the risks related to over-the-counter operations (see ‘Background’).
“Central counterparty clearings have proven their worth during the financial crisis,” reads a note issued by the EU executive. “The Commission has since October 2008 worked with industry to ensure that clearing of credit derivatives swaps takes place on European CCPs. The Commission also considers that the broader use of CCPs in other OTC derivatives markets should be incentivised wherever possible,” it adds.
Dealers breathed a sigh of relief that Brussels was not insisting on exchange trading for now. The bulk of the world’s OTC trading is done in London and New York, and a less strict regime in the EU could attract business from across the Atlantic, industry experts say.
The Commission did not indicate whether the EU should have a single or multiple clearing houses for derivatives, but it seems certain that the two main competitors, Paris and London, will both obtain a clearing seat.
However, it remains unclear what will happen when should a clearer headquartered outside the euro zone encounter problems, such as those in London. “No central bank will provide liquidity to institutions located outside its currency area,” states a note by the Commission.
McCreevy is also proposing to standardise contracts and create a central data depository to store records of trades. Brussels is not ruling out a European central data repository as the best option, but an opinion from national regulators within the CESR is expected to shed more light on the political viability of this possibility.