The EC has been consulting
with market participants for a year, but is now drafting
legislation, to be published in September.
the European Parliament – which does not initiate
legislation but votes on it – adopted a resolution
calling for EU rules on derivatives trading to be made clearer
parliament wants to reduce speculative trading and would like
derivatives to be traded through "open channels that are
subject to rules" as much as possible.
It called for
central counterparty (CCP) clearing facilities to be
strengthened and for regulators to ensure they are resilient
even under a lot of stress. The resolution backed lighter
regulation of over-the-counter derivatives for corporate end
users, but said the new European Securities and Markets
Authority (Esma) should set thresholds beyond which central
clearing should be mandatory.
legislators would like to see a ban on speculative credit
default swap trading and a requirement that all CDS be
centrally cleared through a European CCP.
Parliament’s resolution is a guide to the
direction the assembly wants policy to take, but the
legislation is being drafted by the Commission.
specialists have praised the EC’s openness to
consulting thoroughly with market players in order to make the
legislation as workable as possible. But it is still possible
that parts of the law could be onerous or inconvenient for the
25 page Public
Consultationon Derivatives and Market
published on June 14, called for advice from the market in four
areas – clearing and risk mitigation of OTC
derivatives; requirements for CCPs; interoperability; and
reporting obligations and requirements for trade repositories.
The consultation closed on July 10.
and risk management, the EC is considering how to meet the
objective agreed by the G20 leaders that "all standardised OTC
derivatives should be cleared through central counterparties by
end-2012 at least".
suggests that two approaches be used together to decide which
contracts must be cleared.
'bottom-up’ approach involves a CCP choosing which
contracts it wants to clear, and submitting proposals to the
competent authority supervising it. Esma would then decide
whether a clearing obligation should apply to those
'top-down’ approach, Esma and the European
Systemic Risk Board would decide which contracts must be
obligation would require that financial parties clear all
eligible derivative contracts with an authorised CCP, even if
trading with counterparties outside the EU. CCPs would be
obliged to clear contracts, irrespective of the venue of
One of the
most complex and fluid policy areas is interoperability
– meaning participants could choose where their
contracts were cleared. The document gives the impression that
the EC lacks confidence in this area. It seems possible, but by
no means certain, that a right of interoperability could be
introduced. However, the document seems more concerned to ward
off the risks that interoperability could bring.
requirements also carry some big unknowns – precisely
what data the law will insist is collected by trade
repositories, and how much analysis the authorities want to
perform on it.