EU moving towards deal on derivatives crackdown

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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.

The EU, the United States and their partners in the world's top 20 economies (G20) pledged in 2009 that derivatives in the $600 trillion off-exchange (OTC) market should be standardised, cleared and traded on platforms, where possible, by end 2012.

The aim is to curb risks that alarmed regulators when Lehman Brothers bank crashed in 2008, leaving a trail of derivatives with exposures that could not be quickly quantified.

At a meeting yesterday (9 June) most ambassadors from the EU's 27 states backed or raised no objections to a new compromise from the bloc's president Hungary, two EU diplomats with direct knowledge of the talks said.

Hungary proposed that the draft law's clearing requirements should apply only to off-exchange (OTC) derivatives while the mandatory reporting requirements would apply to all types of trades, including those executed on exchanges.

This puts the member states on the same page as the European Parliament, which has joint say on the measure, thereby bringing a final deal within sight. Banks want clarity on how to prepare for major changes in the way they trade derivatives. 

EU president Hungary had no comment on the negotiations.

Geithner intervention

The draft law contains safeguards so that users have a choice of where to clear trades.

Britain wants the draft EU law to cover all derivatives so these safeguards apply to clearing of exchange traded derivatives as well. 

This stems from its concerns over the planned merger of Deutsche Boerse and NYSE Euronext whose vertical trading to clearing and settlement model will trade over 90% of listed derivatives in Europe.

"The UK seems to be quite isolated as the consensus is for extending the regulation to reporting of all derivatives but not for clearing," an EU diplomat said.

US Treasury Secretary Timothy Geithner had intervened before Wednesday's meeting to back Britain's campaign.

He wrote to the EU on 2 June, urging it to include all derivatives in clearing requirements so there is "open and fair access" and "non discriminatory clearing".

"We should work to avoid geographic requirements that restrict where derivatives must be traded, reported or cleared, and constraints that could limit where trade repositories or CCPs (clearing houses) are located," Geithner said in his letter obtained by Reuters.

"Putting in place a robust, non-discriminatory market infrastructure will have long-term benefits in promoting market efficiencies, lowering costs to market participants and reducing systemic risk," Geithner wrote.

EU ambassadors meet again on 16 June in a bid to hammer out a fully agreed text among member states for finance ministers to endorse on 20 June, so that negotiations with parliament on the final shape of the law can begin.

But two major hurdles still remain for EU states:

  • Disagreement over whether the European Securities and Markets Authority rather than national supervisors should have the power to authorise and supervise clearing houses;
  • disagreement over whether clearing houses should have access to funds of a central bank if they clear instruments denominated in the bank's currency.

EURACTIV with Reuters

 

The European Commission opened an investigation into the derivatives sector in October 2008, a month after the collapse of Lehman Brothers, a bank heavily involved in the $600 trillion global derivatives market.

Derivatives trading, much of which takes place between banks, is used to guard against damaging moves in interest rates, inflation or commodity prices. But their open-ended and opaque nature made it hard to assess exposure in the $600 trillion sector when US bank Lehman Brothers collapsed at the height of the financial crisis.

The European Commission clearly supported this approach in a communication published in July 2009 (EURACTIV 06/07/09).

In May 2011, the European Parliament's economic affairs committee voted overwhelmingly in favour of a draft law to standardise derivatives so they can be moved through central clearing houses to reduce risk and improve transparency.

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