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In an effort to achieve a rapid agreement with the European Parliament (EP), the European Council (EC) has adjusted its position on a draft regulation aimed at increasing transparency on all derivatives and reducing risk in the over-the-counter (OTC) derivatives market.
The draft regulation calls for the clearing of standardized OTC derivative contracts through central counterparties (CCPs) in order to reduce counterparty risk. This is aimed at preventing the default of one market participant causing the collapse of other market players, thereby putting the entire financial system at risk.
To be authorised, a CCP would have to hold a minimum amount of capital. Specifically, the draft regulation requires a CCP to have a mutualized default fund to which members of the CCP would have to contribute.
In addition, all derivative contracts would have to be reported to trade repositories (i.e. central data centres). Trade repositories would have to publish aggregate positions by class of derivatives, thereby offering market participants a clearer view of the derivatives market. The European Securities and Markets Authority (ESMA) would be responsible for the surveillance of trade repositories and for granting and withdrawing their registration.
ESMA would also be responsible for the identification of contracts subject to the clearing obligation, while national competent authorities, in coordination with a college of supervisors, would be responsible for the authorization and supervision of CCPs, except in the case of CCPs from third countries, which would have to be recognized by ESMA, provided they met certain conditions.
The main change now proposed by the EC relates to the procedure for authorizing central counterparties, and, in particular, to the powers of the CCP's "home" member state, as against the powers of the college of supervisors and ESMA.
The EC had specified that a CCP authorization by a member state competent authority could only be blocked by a negative opinion of the college supported by a "unanimity minus one" vote (i.e. all the members of the college, excluding the authorities of the "home" member state). However, in order to facilitate agreement with the EP, which is pushing for a stronger role for the college and for ESMA, the EC has made changes which would introduce two additional safeguards.
The changes stipulate that, following a negative opinion of the college with "unanimity minus one", the "home" member state can refer the matter to ESMA for binding mediation, and, when a "sufficient" majority in the college opposes authorization of a CCP, this “sufficient majority" may then decide to put the issue to ESMA for binding mediation.
The EC's position defines a "sufficient" majority as two-thirds of college members, with votes in the college limited to two per member state for colleges of up to and including 12 members and three for colleges above that size.
Negotiations over the past weeks have also produced compromises in that pension schemes would be exempt from a clearing obligation for a period of three years, extendable by another two years plus one year, subject to reports justifying the deferrals; and that CCPs from third countries would only be recognized in the European Union if the legal regime of the respective third country provides for an effective equivalent system for the recognition of CCPs authorised under foreign legal regimes.
Margrethe Vestager, the Danish Minister for Economic and Interior Affairs, commented that: “We are now in the process of ensuring stricter regulation of the financial sector and I am pleased that we already today reached a concrete result in the form of a council agreement on regulation of trade with derivatives. Now the only thing missing is a final agreement with the EP. This is an important step towards improved regulation of the financial sector – this work will continue with other legislative initiatives in the area of financial regulation during the Danish presidency.”
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