EUROPE - Steps to tame financial markets have been announced by the European Commission, which has introduced a consolidated position for the EU comprising new regulations to cover markets in derivatives.
Under its draft set of rules, the Commission's safety measures will have over-the-counter (OTC) derivative trades reported to trade repositories (data centres), hence making them accessible to supervisory authorities.
Standardised derivative contracts - that is, contracts that follow a specified format - are proposed to be cleared through central counterparties (CCPs).
This is to reduce counterparty credit risk - that is, the risk that one party to the contract defaults -while a CCP is a commercial firm that comes between the two counterparties to a transaction.
French national Michel Barnier, commissioner for the Commission's Internal Market and Services, says no financial market can afford to remain a "Wild West territory".
"The absence of any regulatory framework for OTC derivatives contributed to the financial crisis and the tremendous consequences we are all suffering from today," he says.
He adds that the new rules will bring more transparency, "so we know who is doing what". Next step for the proposal is clearance through the European Parliament, and by EU governments, meeting in the Council of the EU.
The Commission has not given a programme for the clearance process, but, on past records, a year is likely.
For instance, the current Financial Supervision Package - which is on track to see the setting up of the new financial authorities to regulate banking, insurance, and securities - is likely to clear through the European Parliament's plenary session in Strasbourg next Wednesday (22 September). That is roughly a year from being tabled by the Commission.
However, the Commission clearly hopes the derivatives legislation would be in force from the end of 2012. If the size of the derivatives market is anything to go by, the risk that the new rules will combat is colossal. Commission figures show that, by the end of 2009, the notional value of derivatives equalled approximately $615trn (€473trn). This is in the order of seven or eight years of total production by the whole world (global GDP).
The Commission says its proposal conforms to the EU's G20 commitments. It says its approach is "fully in line" with that adopted by the US. Any surprise at the newly announced Brussels controls on the OTC derivatives issue is unjustified. Development of the legislation has a long history. In fact, the Commission considered the possibility of introducing EU legislation for CCPs in 2006, but then decided against it.
By late 2008, EU finance ministers were asking for the risks to be investigated. In early 2009, the Paris-based Committee of the European Securities Regulators (CESR) was calling for "evidence on the technical standards to identify and classify OTC derivatives".
By October 2009, Eddy Wymeersch, then head of CESR, was suggesting Europe could follow the US in adopting the use of trade repositories for processing credit default swaps. CESR is due to be reformed as the European Securities and Markets Authority in January 2011.
A contribution, dated July this year, from the European Fund and Asset Management Association, found that investment managers support the proposal to "introduce a clearing obligation" and "set the framework for a robust process to determine the eligibility of OTC contracts to which mandatory clearing will apply".