Parliament to take lead on derivatives regulation


The European Parliament is set to adopt new rules in April that will push for the establishment of a single European clearing house for credit derivatives. Lawmakers want to increase checks on such risky financial products, which stand accused of worsening the financial crisis by multiplying victims of insolvencies.

The new rules are set to be introduced by amending the Capital Requirements Directive (CRD), a piece of EU legislation that governs the risk exposure of financial institutions.

The directive is currently being reviewed and is due to be voted upon in the Parliament’s economic committee in March, before the text is submitted to a plenary vote in April. 

French Socialist MEP Pervenche Beres, who heads the committee, presented an amendment aimed at introducing centralised monitoring of credit derivatives, and credit-default swaps in particular. “Credit-default swaps on European entities should be processed through a European clearing house to mitigate counterparty risks and more generally to reduce overall risks,” reads the draft text.

The amendment is expected to be adopted easily, as most political parties appear to support it. “We forsee an easy majority for the adoption of the amendment,” a Parliament spokesperson told EURACTIV. “The fact that the Commission has supported the move is very important,” the spokesperson added.

Internal Market Commissioner Charlie McCreevy indeed backed the amendment. “Now a regulatory approach is necessary,” he told MEPs in a hearing in the Parliament on Monday (3 February), after taking note of the industry’s failure to reach a voluntary agreement. 

Indeed, the main actors in the credit derivatives market failed to agree on a common position during a series of discussions organised by the Commission in December. McCreevy therefore urged the Parliament to act in favour of regulation by revising of the Capital Requirements Directive (CRD). “We think this is the most effective way to reach our goal,” said the commissioner’s spokesperson. 

However, introducing such a crucial regulation via the complex CRD does not come without risk. Indeed, the directive is under attack from many member states on different issues, and its final approval is far from certain.

Moreover, the amendment does not imply direct regulation, but puts the ball back in the Commission’s court by asking it to “put forward legislative proposals to regulate credit-default swaps”.  

Critics view this as another McCreevy attempt to avoid taking a direct role in imposing regulation. The commissioner is indeed a fierce supporter of self-regulation and has repeatedly rejected attempts to regulate the financial industry (see EURACTIV 28/01/09EURACTIV 06/11/08).

The industry, which is currently busy fighting similar regulatory attempts in the US, is pushing for the status quo to be maintained and dialogue restarted with the institutions on self-regulation. In a recent press release, ISDA, the International Swaps and Derivatives Association, claimed it has shown a “demonstrable commitment to centralised clearing”.

Credit-default swaps are a particular type of credit derivative aimed at guaranteeing a creditor against the risk of default or delays in getting back the credit. Their use was unheard of ten years ago, but their market is now worth hundreds of trillions of euros. 

Credit derivatives typically use benchmarks to value a debit. Once the benchmark is reached, the creditor is paid back a certain amount of the credit, even in the absence of a default.

The advantage of credit derivatives is that they allow companies and governments to increase their ways of managing risk. On the other hand, if irresponsibly used, they can increase risks at exponential levels, spreading bad consequences of defaults through markets.

The idea of establishing a central clearing house is considered a moderate way to reduce systemic risks related to derivatives. Instead of being exchanged privately ("over the counter", according to the jargon), they will be processed through a third intermediary, which will decrease costs and risks while raising guarantees. 

The industry fears that introducing a model similar to that for exchanges might wipe out the added value of derivatives undermining their very existence.

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