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European Parliament approves new legislation on OTC derivatives

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EUROPE - The European Parliament has approved new legislation for over-the-counter (OTC) derivatives trades, confirming the temporary exemption of pension funds from the EMIR Directive and sticking with the requirement to report all derivatives contracts to central data centres.

Following a draft regulation that was provisionally agreed on 9 February by Parliament and Council negotiators, the Parliament today confirmed the implementation of a number of proposals to make OTC derivatives "safer and more transparent".

EU commissioner Michel Barnier said: "With this new regulation, we are taking a big step towards financial stability. We are reducing the risk of a future financial crisis, with all its consequences on the real economy, growth, jobs and public budgets.

"The EU has now also fulfilled its G20 commitments in this field, and on time. I call on all other jurisdictions around the globe, which have not yet done so, to take the appropriate steps to meet our shared G20 commitments."

In the new legislation, MEPs secured a requirement that all derivatives contracts - not only OTC derivatives - must now be reported to central data centres or trade repositories.

Those centres or repositories would then have to publish aggregate positions by class of derivatives, "thereby offering market players a clearer view of the market", according to the Parliament.

Parliament confirmed that trade repositories will be monitored by the European Securities and Markets Authority (ESMA), which will be responsible for granting or revoking registrations.

It said its negotiators had "strengthened" ESMA's role by making it easier for it to block the authorisation of a central counterparty (CCP) to operate in the EU's internal market. 

"They also provided for binding mediation by ESMA in disputes among national authorities over the authorisation of CCPs," it added.

Parliament also agreed that CCPs from "third countries" would be recognised in the EU only if the legal regime of the country in question provided for an effective equivalent system for recognition.

Under the new EMIR Directive on OTC derivatives trades, pension schemes will have to centrally clear their derivatives trades.

However, Parliament agreed on a "light touch" for pension funds, exempting them for three years, or at least until central counterparties develop a "suitable technical solution" for the transfer of non-cash collateral for variation margin.

This period will be extendable by another two years plus one, subject to proper justification.

Responding to a consultation paper on the EMIR Directive's draft technical standards last week, a number of market experts argued that several proposals within the new regulation could impact pension funds deeply.

One of the main concerns for European schemes remains the posting of large amounts of cash as collateral in derivatives trades.

According to those experts, using a large amount of cash as collateral would result in lower returns for pension funds - and therefore savings and pensions - for contributors across Europe.

 

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