The European Union (EU) has pushed ahead with its reforms of the region’s financial markets by publishing consultation papers that outline its proposed frameworks for regulating derivatives trading and short selling.
The EU’s consultation on derivatives and market infrastructures provides detail on how the commission intends to enact the broad policy goals published in October 2009 and is intended to be the final step before legislative proposals are published in September. This last consultation period will end on 10 July.
In October, the EU announced its intention to “reduce systemic risk and increase transparency” in the over-the-counter (OTC) derivatives market, by introducing mandatory clearing of all ‘standardised’ OTC derivatives and reporting of all OTC derivatives to trade repositories, common rules for central counterparties (CCPs) and trade repositories, and greater transparency through reporting to trade repositories.
The new consultation paper suggests that a new regulatory body – the European Securities and Markets Authority (ESMA), which is expected to evolve from the current Committee of European Securities Regulators – would play a key role in deciding which instruments should be cleared by CCPs. “We need a single list of eligible contracts in Europe. A national approach whereby each member state would decide in isolation could lead to 27 different clearing obligations for market participants,” EU sources said. The consultation asks for the views of market participants on the framework required to ensure CCPs “contain risk in the market instead of becoming a potential source of risk concentration themselves”.
In a separate consultation paper, also open for comment until 10 July, the EU lays out its plans for harmonised rules to mitigate potential risks arising from short selling and credit default swaps ahead of forthcoming legislation.
The paper seeks feedback on the type of instruments that should be covered by a pan-European regime, the level of disclosure required on short positions and the potential harm of permitting uncovered or ‘naked’’ short selling for instruments such as sovereign bonds. The document also suggests that national authorities might be given the power to suspend short selling and the use of credit default swaps in an emergency, but also proposes that ESMA could override national authorities.