EC Publishes Derivatives Proposals

by Ulrika Lomas, Tax-News.com, Brussels

24 July 2009

Following on from recent US proposals, the European Commission has published its draft policy proposals to contain the risks inherent in, and to enhance the regulation of, the over-the-counter (OTC) derivatives markets.

The Commission points to the main characteristics of the OTC derivatives markets (and credit derivatives in particular) – the private nature of contracting with limited public information, the complex web of mutual interdependence between parties in the market, and the difficulties of understanding the nature and level of the risks involved.

The Commission has called, not only for more transparency and safety for investors in the derivatives market, but also for regulators and supervisors to have full knowledge of transactions and positions in the markets. It has, therefore, suggested that trades should be executed on public trading venues and that contracts should be centrally cleared.

It has proposed that there would be a greater standardisation of contracts, electronic affirmation and confirmation services, payment automation and collateral management processes. Such standardisation would not only reduce operational risks, but also enhance regulatory efficiency, in the view of the Commission.

Under the proposals central data repositories would also be established to collect data on, for example, the number of transactions and the size of outstanding positions. European securities regulators (CESR) are currently carrying out a feasibility study for a data repository based in the EU. In the light of the forthcoming CESR report, the Commission will decide on appropriate action.

It has been proposed that a pan-EU supervisory body (The European Systemic Risk Board) would be set-up to oversee systemic risk and to improve consistency in applying EU rules in day-to-day supervision.

Following public consultations until September this year, the Commission will then draw together its operational conclusions and present appropriate initiatives, including legislative and regulatory proposals, before the end of the year.

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