The European Commission has issued its proposals to ensure “safe and sound derivatives markets” in Europe and will announce draft legislation in 2010.
The commission said the proposals included policy actions that would increase transparency, reduce counterparty and operational risk in trading “and enhance market integrity and oversight”.
The announcement follows a consultation exercise on the EC’s initial guidelines launched in July, which culminated with a public hearing in September. The EC said the proposals are in line with the Group of 20 statement issued in Pittsburgh last month, adding that it would work with other authorities to avoid regulatory arbitrage.
“This communication marks a paradigm shift away from the traditional view that derivatives are financial instruments for professional use and thus require only light-handed regulation. 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,” said internal market and services commissioner Charlie McCreevy.
According to the communication, the future policy actions will seek to reduce counterparty risk by: proposing legislation to establish common safety, regulatory and operational standards for central counterparties (CCPs); improving collateralisation of bilaterally-cleared contracts; substantially raising capital charges for bilaterally-cleared transactions; and mandating CCP-clearing for standardised contracts.
Transparency would be increased 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 standardised derivatives on exchanges and other organised trading venues, and; increase transparency of trading as part of the review of MiFID.
The Commission will now start the process of drafting legislation to meet its intention of introducing derivatives legislation in 2010.