The UK government has found itself isolated in its opposition to draft EU derivatives rules as finance ministers are expected to express their "unanimous" backing to the European Commission's proposal on Tuesday (4 October).
G20 leaders agreed in 2009 that derivatives, largely traded bilaterally between banks in an opaque $600 trillion (€426 trillion) sector, should be traded electronically to curb risks highlighted by the 2008 financial crisis.
Under European Commission proposals, EU regulators would decide which derivatives must be traded on a platform that would require central clearance by the newly-established European Securities and Markets Authority (ESMA), based in Paris.
Finance ministers from the 27 EU member countries are meeting in Luxembourg on Tuesday (4 October) to confirm their backing for the plans, with officials from the Polish EU Presidency saying the proposal garnered support all member states "minus one".
The UK opposes the proposal, saying national regulators, not European ones, should remain in charge of clearing most of the trades. The UK said it wants the regulation applied to all derivatives, not just over-the-counter (OTC) ones.
"We have a concern about ESMA doing it rather than national regulators," said a diplomat close to the negotiations.
The diplomat said any attempt at forcing the legislation through without the UK's approval would trigger uproar among parliamentarians and the British press. "[It] will really make the pro-European cause more difficult to argue," he said.
The City of London is the EU's biggest hub for financial clearing and could lose business according to the rules. "As a country with three quarters of the EU's business in derivatives trade and 50% of global trade, we think that this 'unanimity minus one' doesn't really hold," said a diplomat.
"Unanimity minus one of course is just not unanimity," the diplomat stressed.
The Polish EU Presidency has tabled a compromise proposal, which it said allows room for further negotiations.
France keen to close the issue ahead of next G20
Other EU countries have called on Britain not to block a proposal that was promised in 2009. Back, then, G20 leaders agreed that derivatives traded over-the-counter (OTC) or privately among banks should be centrally cleared and reported to a repository by the end of 2012.
France, which is holding the G20 presidency this year, is keen to muster European unity at the next G20 finance ministers meeting in October that will pave the way for a leader's summit in Cannes later in November.
"Everyone must face their responsibilities," said a diplomat from a large EU member state. "We have found a compromise which is reasonable, not to say weaker."
"At some point, the lessons from the crisis need to be drawn."
The diplomat added, however, that it was "in nobody's interest" to put the UK in a minority and push through the reform without its support.
And this means Britain still has a virtual right of veto on the plans.
"Barnier's people have given us assurances that he wants to turn up to the G20 with his hands full and doesn't want to do anything without the support of the UK," the first diplomat said. "We've got no reason to believe he is not a man of his word."
World leaders (G20) agreed in 2009 that derivatives traded over-the-counter (OTC) 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, detail is taking more time to finalise.
On 15 September 2010, the European Commission tabled a proposal for a regulation on OTC derivatives, central counterparties and trade repositories.
- 4 Oct.: EU finance ministers meeting (Luxembourg)
- 14-15 Oct.: G20 ministerial meeting "finance"
- 3-4 Nov.: G20 summit in France (Cannes)
- European Commission:Derivatives [FR] [FR] [DE]
- European Commission:Press release on derivatives proposal(15 Sept. 2010) [FR] [FR] [DE]
- Council of the EU: Background note on 4 Oct. Ecofin meeting(30 Sept. 2011)
- G20-G3 France:The priorities of the French Presidency