Finance ministers break impasse on derivatives regulation


EU countries broke a deadlock in talks to crack down on the derivatives market, as France and Britain resolved a turf war over how much say a pan-European watchdog can have over national markets, diplomatic sources said.

The breakthrough which came at the meeting of EU finance ministers yesterday (24 January) means member states can move ahead to negotiate with the European Parliament on a final joint text as early as next week in a bid to comply with a globally agreed December deadline for the new rules.

EU regulators have tried to forge rules to drive derivatives on to exchanges since September 2010, but talks have been hampered by a British and French impasse over which regulator has ultimate say – the European Securities and Markets Authority (ESMA) or the national authority.

Finance ministers agreed that the EU's 27 national regulators can overturn the decision to allow a clearing house to operate in a national market by a two-thirds majority.

Maintaining local control a key issue

European Commissioner Michel Barnier drew up the draft law after the Group of 20 nations agreed in 2009 that uncleared derivatives were instrumental in bringing large financial firms such as Lehman Brothers and American International Group to their knees.

Trades on most major stock exchanges, including London, go through a central counterparty, which can offset any losses borne if payments fall through.

The bulk of derivatives are traded off-exchange or over-the-counter among banks and vast amounts of contracts are set to be funnelled through clearing houses, sparking concerns among local regulators about how to maintain a strong voice.

Clearers and regulators in the City of London claimed they preferred the onus for regulation and licencing of any central counterparty clearing house (CCP) to be at home, for technical rather than political reasons.

"On the national level the advantage is that regulators have to regulate a number of CCPs. They are going to be closer to CCPs. They are in a better position to exercise technical standards from ESMA," an industry source said.

On Tuesday, France also passed a new law requiring CCPs to have a national banking licence to operate in that market. The source said this was an attempt to clamp down on potential competitors.

New rules are part of agreement at G20 level

An EU source said France was keen to have as many euro-denominated clearers as possible as these would have access to central bank liquidity if required. The source said the French were worried about bearing the cost of defaults not in euros.

"The use and security of CCPs are crucial from a G20 point of view and should not be subject to political debate," said David Clark, chairman of the Wholesale Markets Brokers Association (WMBA).

"Central banks realised a long time ago that if a CCP goes bust, they will have to stand by to resolve the mess. Agreeing a resolution process for CCPs remains the key issue," Clark said.

Alex McDonald, chief executive of the brokers association, said CCPs are seen as narrow banks in Britain and may access liquidity lines from the Bank of England if need be, subject to certain conditions.

In September 2009, G20 countries agreed that all standardised over-the-counter derivatives should be cleared through CCPs by end-2012 at the latest and that the contracts should be reported to trade repositories.


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 and trade repositories.


  • 30 Jan. - 3 Feb. 2012: Compromise proposal of the finance ministers to be examined by the European Parliament.

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