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.