EC Proposes Actions Towards Safety Of Derivatives Markets

by Ulrika Lomas, Tax-News.com, Brussels

22 October 2009

The European Commission has set out future policy actions it intends to take to increase transparency of the derivatives market, reduce counterparty and operational risk in trading, and enhance market integrity and oversight.

They follow consultations launched in July and a public hearing in September. Legislative proposals in 2010 will be in line with the G20 Pittsburgh statement and will be accompanied by a thorough impact assessment, according to the Commission.

The Commission states that it wishes to ensure a global consistency of policy approaches and stands ready to work with authorities around the world in finalizing the proposals. Cooperation with the US is particularly important, says the Commission, as the US is also in the process of designing a new approach to derivatives markets.

Internal Market and Services Commissioner Charlie McCreevy said: "The Commission proposes a comprehensive approach that will ultimately enable markets to price risks properly. We cannot afford another situation where the risks of the financial sector are ultimately borne by the taxpayer."

According to the Commission the future policy actions will reduce counterparty risk by:

• proposing legislation to establish common safety, regulatory and operational standards for central counterparties (CCPs);
• improving collateralization of bilaterally-cleared contracts;
• substantially raising capital charges for bilaterally-cleared as compared with CCP-cleared transactions; and
• mandating CCP-clearing for standardized contracts.

Further, the Commission asserts that the policy actions will be designed to reduce operational risk by promoting standardization of the legal terms of contracts and of contract-processing, and to increase transparency by:

• mandating market participants to record positions and all transactions not cleared by a CCP in trade repositories;
• regulating and supervising trade repositories;
• mandating trading of standardized derivatives on exchanges and other organized trading venues; and
• increasing transparency of trading as part of the review of the Markets in Financial Instruments Directive (MiFID) for all derivatives markets including for commodity derivatives.

The Commission concluded by stating that it will also enhance market integrity and oversight by clarifying and extending the scope of market manipulation as set out in the Market Abuse Directive to derivatives and by giving regulators the possibility to set position limits.

Recommended