Brussels, 14/06/2010 (Agence Europe) - The European Commission has started a public consultation exercise that will run until Saturday 10 July on various aspects of the EU's new legislation covering financial derivatives makers, worth up to €600,000 billion in the EU. The Commission wants financial operators and regulators to give their views on the following: - the procedure used to decide whether a derivative must be cleared at a central clearing house (central counterparties, CCPs); - the rules ensuring the CCPs do not over-focus on risks attached to derivatives (by creating its own risk committee, CFP participation rules, capital requirements and setting up a fund to cover risk of default); - interoperability of CCPs; - conditions whereby CCPs from outside the EU would be allowed to operate in the EU (equivalence between EU rules and those in other countries, for example); - rules governing bodies responsible for registering and storing derivatives deals; - and the obligation on market operators to provide information about deals they hold. Registration and CFP supervision are not covered in the consultation.
Derivatives are financial contracts such as swaps and futures whose value is determined by the price of something else - the 'underlying' - can be any kind of asset (like a share, a commodity or a currency) or a market variable (like an exchange rate or stock market index). Through payment of a set fee, they allow financial players to hedge their bets and transfer risk to other operators, rather like an insurance contract. The financial crisis revealed the negative side of derivatives and hedging, which can impact on financial stability due to the secrecy surrounding over-the-counter trading and over-concentration on the debt derivatives market.
The Commission has put to interested parties two possibilities which will allow a decision to be taken on whether a derivative is eligible for central clearing. Firstly, a CCP would decide to clear certain derivatives. It submits its proposal to the supervisory authority of the member states in which it is established and the authority informs the new European Securities and Markets Authority (ESMA) which is provided for in the financial supervision legislative package. Within six months, ESMA reaches a decision on the eligibility of the class of derivatives and the clearing obligation conditions (for example, date of application). The second approach would have ESMA, working with the new European Systemic Risk Council, also provided for as part of the supervision package, determine which derivatives should be subject to clearing obligation. According to the Commission, the G20 aim of making the clearing of standardised contracts obligatory cannot be left exclusively to the industry. European banks would prefer a market-led, rather than an imposed, system (see EUROPE 10158).
The Commission, of the opinion that the European code of conduct for the liberalisation of the post-trading sector has not produced the hoped-for results, wants to bring binding interoperability principles between two or more central clearing houses into European legislation. As part of an interoperability agreement with another CCP, a CCP would have non-discriminatory access to information on that entity so it can successfully carry through its activities and to the relevant clearing system. The aim of any restriction should be to control risk which might emanate from an interoperability agreement and it must be justified in writing by the party to the agreement which is reticent about communicating the required information. (M.B./transl.fl/rt)