The European Parliament voted yesterday (29 March) to adopt new rules to make over-the-counter derivatives trading safer and more transparent.
In order to reduce risk, the regulation requires all OTC contracts to be cleared through central counterparties (CCPs), while non-OTC derivative contracts will have to be reported to so-called "trade repositories" to ensure more market transparency.
ESMA, the European Securities and Markets Authority, would be responsible for overseeing the trade repositories.
Over-the-counter derivatives contracts were widely blamed for market volatility during the 2008 financial crisis. The Group of 20 industrial and developing nations decided in 2009 that all such standardised contracts should be traded on exchanges or electronic platforms and cleared through central counterparties to reduce the risks from a potential default.
Investors fear the tight legislative timeline and the heavy workload of the newly installed ESMA will derail the enforcement of the legislation. ESMA is charged with drawing up standards for applying the new rules, but it won't release its draft set until summer – more than a month after the rules become law.
"Quite a lot of the regulation requires technical standards to be written. There just isn't much time to comment on it. We'll be working through the summer," one investor group representative was quoted as saying.
The world's $600 trillion over-the-counter derivatives industry is important to non-financial companies, which use longer-term foreign exchange derivatives to hedge price fluctuations in the products they buy and sell abroad.
The new legislation also strengthens rules on transparency, management of clearinghouses, including capital reserves they must hold against insolvency. Traders or investors who would try to violate the rules would face penalties.
EU ministers have to sign off on the set of rules approved by the Parliament. The European Commission is expected to decide on the technical recommendations from ESMA in September.
The vote followed an agreement reached by the Parliament and Council negotiators on 9 of February.
Sharon Bowles (LibDems, UK) chairperson of the EP's Economic and Monetary Committee and ALDE negotiator on the Regulation, stressed: "I have been fighting for an open approach which I believe leads to better, more transparently regulated markets and reduces operational risks of all actors involved in the OTC contracts".
“We ensured more transparency around the access requirements to CCPs trading venue, which has laid the groundwork for the Markets in Financial Instruments Directive (MiFID)".
ALDE coordinator in Parliament Economic and monetary committee Sylvie Goulard (Modem, France) reiterated that "In the future CCPs should be under the direct supervision of the European Securities and Markets Authority (ESMA), in line with de Larosière report and the European Supervisory Authorities regulations".
Marc Olivier Herman, Oxfam's EU policy advisor, said: “We welcome today’s decision to bring risky OTC derivative markets out of the dark and into the sight and control of regulators. If properly put in place, the new rules will shed light on an opaque trillion euro market and make effective monitoring and regulation of agricultural commodity derivatives markets possible. This is good news for poor people in developing countries who are hard hit by food price spikes on global food markets.”
Markus Henn, from World Economy, Ecology & Development – WEED, said: “The adoption of EMIR is good news, but now Europe must stick to its guns. The rules adopted must give regulators full oversight of the derivatives market and apply to anyone who trades in these financial products. We urge the European Securities and Markets Authority (ESMA) and the European Commission to make sure that the implentation of EMIR is not delayed or watered down by opposition from powerful vested interests in the finance sector.“
After the vote, Green MEP and finance spokesperson Pascal Canfin (France) said: "It is welcome that these opaque and risky financial products will finally be regulated at EU level. This helpS address the damaging impact unregulated derivatives have had.
“The failure to ensure a more comprehensive role for the European Securities and Markets Authority (ESMA) in regulating central counterparty clearing houses (CCPs) is a major shortcoming however. At the insistence of the UK, the supervisors from other member states that might be impacted if a CCP collapses would only be able to overrule the decision of a national regulator on the basis of unanimity.”
Kay Swinburne MEP, European Conservatives and Reformists’ economics spokesman and one of the parliament’s negotiators on the regulation commented: “This new regulation will address the weaknesses exposed in the derivatives market during the financial crisis, without limiting the ability of businesses to hedge their risks. It was hugely important that businesses and pension funds were not subjected to extra costs for hedging their risks. This regulation is carefully targeted at the right people, and drafted to ensure no "collateral" damage to business or pensions.”
"The first stage of our work has been to stabilise derivatives markets. Now we must use the opportunity of upcoming legislation to ensure that European markets become more efficient and competitive."
The Group of 20 nations agreed in 2009 that derivatives traded over-the-counter or privately among banks should be centrally cleared and reported to a repository by the end of 2012.
These commitments were taken in the wake of the 2008 financial crisis as a way to curb the kind of market volatility that threatened to send the world economy into a second Great Depression.
The bulk of the world's $600 trillion (€426 trillion) worth of derivatives are traded in London and New York, but while the EU and United States agree on the objectives, it has taken time to finalise the details.
On 15 September 2010, the European Commission tabled a proposal for a regulation on OTC derivatives, central counterparties – intermediaries between buyers and sellers – and trade repositories.