Brussels, 07/06/2010 (Agence Europe) - Last week, the European Parliament's economic and monetary affairs committee adopted a draft own initiative report by Werner Langen (EPP, Germany) on EU moves to regulate the derivatives market (see EUROPE 10094). The MEPs point out that credit default swaps (CDS, used for hedging against the risk of a debtor not being able to pay back their debts) are very risky to financial stability and should therefore be strongly regulated or banned. The financial rewards associated with the holding of CDS should only be allowed if the holder also holds the debt for which the CDS was issued. Regretting the general lack of information about the role played by CDS in the Greek sovereign debt crisis, the committee wants greater guarantees about information and greater powers of scrutiny for supervisors. The European Parliament will adopt the Langen Report in plenary later this month.
In line with the G20 roadmap, the European Commission is preparing a legislative proposal for the end of the year, the main aims of which will be to make compulsory: - clearing for all standardised derivatives within central counterparty clearing houses (CCPs); - registers listing all derivatives transactions operating on a bilateral basis. Additional capital requirements will be placed on transactions in non-standardised derivatives. The committee supports this general approach. It believes, however, that increased own funds requirements on over-the-counter derivatives transactions could be increased if the clearing system is seen as being sufficiently robust.
On the scope, MEPs set three cumulative conditions to bring CDS transactions under the European rules being prepared: - the contract must be in the currency of a member state; - the CDS must be secured against a European entity (a company, a European currency, a member state's debt instrument); - the CDS must involve a European financial institution. “There has to be regulation, but we must ensure that transactions are not all transferred to Hong Kong,” Langen told Agefi.
The committee also backed Internal Market Commissioner Michel Barnier's desire to exempt non-financial businesses from having to make use of clearing houses (see EUROPE 10132). MEPs acknowledge that the final users of CDS need the flexibility to prepare contracts which best meet their cover requirements. They suggest that the new European Securities Markets Authority (ESMA), provided for in the financial supervision legislative package, should set the thresholds above which transactions carried out by non-financial institutions have to be cleared through CCPs.
The committee vote revealed a clear EP majority for full exemption from the requirements of central clearing for end-user companies, said UK Conservative MEP Kay Swinburne. Committee chairwoman Sharon Bowles (ALDE, UK) said it was essential that companies using CDS should not be forced to clear them within the European Union, whatever the nature of the contracts. She welcomed the position adopted by MEPs that CCPs established in third countries should be subject to firm equivalence rules, in order to ensure cooperation and information exchange with European supervisors. (M./B./transl.fl/rt)