Brussels, 06/09/2010 (Agence Europe) - The commissioner responsible for the internal market, Michel Barnier, is to present, on Wednesday 15 September, a proposed regulation designed to increase the transparency of transactions in derivative financial products, a market estimated at nearly €600,000 billion. This proposal, which is designed to respond to the regulatory commitments made in the framework of the G20 following the financial crisis and of which EUROPE has obtained a copy, aims to create a framework for the activities and supervision of the entities which create the architecture of the “post-market” sector, which are: the central clearing facilities (CCP) tasked with compensating the standardised derivative products; the central transaction registers (trade repositories) which register all transactions in derivatives, whether or not they are compensated. This proposal says nothing about the powers of veto of the future European Securities and Markets Authority (ESMA) provided for by the “financial supervision” package of certain derivatives or transaction techniques used for derivatives. This issue will be dealt with under a specific initiative, which will be put forward at the same time. The new rules are expected to enter into force by the end of 2012.
The proposal will apply to all categories of contracts on derivatives traded by mutual agreement (“over the counter” or OTC) and to the financial companies which use them. Non-financial companies active on this market will be covered by the future legislation if the volume of contracts exchanged presents a risk of systemic dimension and if these contracts do not arise directly from their commercial activities. The European Commission is considering two European minimum thresholds, one by compensation and the other by category of derivatives. Beyond an initial threshold, these companies will have to communicate their positions to the national regulator. Beyond the second, the non-financial companies will have to compensate their derivatives in a CCP.
The Commission does not wish to leave it up to the industry alone to determine which derivatives are eligible for compensation within a central clearing facility. It is bringing in a double procedure to create a “standardised” derivative: - a CCP wishing to compensate a contract receives the approval of its national supervisor, which will in turn inform ESMA, the European authority with the power to require the product to be compensated throughout the EU; - ESMA, assisted by the future European Systemic Risk Board, will determine which contracts must be subject to this kind of compensation obligation. A clearing house will be obliged to agree to compensate any standardised contract, irrespective of the platform on which it was traded.
Supervision. A clearing house must seek accreditation from the competent national authority which will be supervising it on a daily basis. According to the Commission, ESMA will play an important role. As well as drafting technical standards to guarantee the uniform supervision of the CCPs, the European authority will hold binding powers in the event of a dispute between two national supervisors involved within the college controlling a CCP. All facilities will have to set up a risk management committee and regularly carry out stress tests. With an initial capital of €5 million, it will also be obliged to create a fund designed to anticipate any defaulting on the part of a participant. Participation in these funds will depend on the level of exposure of each participant. Interoperability between two clearing facilities will be authorised, but the Commission is limiting such opportunities to “cash securities”, as the banking industry has requested. As for European financial players using CCPs established in third countries, it will be up to ESMA to authorise this and to certify the equivalency of the third countries' legislation with the future European legislation.
Trade repositories. All transactions in derivatives will be listed in central registers. These registers will publish consolidated data for each category of derivative. They will obtain from ESMA accreditation which is valid throughout the EU. The European authority will supervise the activities of these registers. On its request, the Commission will be able to impose fines in the event of infringements of European legislation. It will propose to the Council that negotiations be launched between the EU and a third country with a view to the signature of an international agreement which will make it possible to exchange information on derivatives.
Derivative financial products are financial contracts whose value derives from the value of an underlying asset (e.g. share, bond, raw material, credit) or of a market variable (e.g. interest rate, stock index). In exchange for a fixed sum payment, they will allow financial players which have the means to do so to transfer some of their risks to other players, a bit like an insurance policy. Some of them may include standardised characteristics such as the notional value or the maturity of a contract. Most of them are traded bilaterally. The financial crisis has shown how the markets can have a negative impact on financial stability, due amongst other things to the lack of transparency surrounding transactions carried out by mutual agreement between the players and an excessive concentration of said players, particularly on the credit derivatives market. (M.B./transl.fl)