Copenhagen, 29/03/2012 (Agence Europe) - On Thursday 20 March 2012, the European Parliament gave its full endorsement to the inter-institutional agreement in principle on the draft EU derivatives regulation (see EUROPE 10551). Rapporteur Werner Langen (EPP, Germany) said it was one of the cornerstones of the European regulations brought in after the 2008 financial crisis. The Bank of International Settlements says that the derivatives markets exceeded USD 700 trillion in value in 2011, mostly comprising currency exchange rate derivatives and credit default swaps (CDS). This is twelve times more than the combined GDP of all the inhabitants on planet earth, explained Langen.
The new regulation will come into force at the end of the year. It aims to make trade in over-the-counter (OTC) derivatives safer and more transparent. It introduces compulsory clearing for OTC derivatives and reporting for all derivatives. The regulation stipulates that OTC derivative contracts will have to be cleared through central counterparties (CCPs), thus reducing counterparty credit risk, i.e. the risk that one party to the contract may default. Data will be published on an aggregate basis for each class of derivatives. The rapporteur hoped that the new rules would make many derivatives more expensive for companies that use them and more profitable for banks, but warned that safety comes at a price.
In the negotiations, MEPs secured a requirement that all derivative contracts (not only OTC derivatives), would have to be reported to central data centres or “trade repositories”, which would have to publish aggregate positions by class of derivatives, thereby offering market players a clearer view of the market.
ESMA. The question of the powers of the European Securities and Markets Authority (ESMA) dominated the inter-institutional talks from start to finish. Unlike the Council of Ministers, the European Parliament wanted a highly European solution for the supervision of derivatives market infrastructure. The work of trade repositories will be monitored by the European Securities and Markets Authority (ESMA), which will be responsible for granting or withdrawing their registration, but will not have the same powers over CCPs, although ESMA will have a binding mediation role in the event of disputes among national authorities over the authorisation of CCPs. Langen said ESMA has been given greater powers and welcomed the fact that after much wrangling in the talks with the Council of Ministers, France, Germany and the United Kingdom conceded on this point.
The final solution is not to everyone's liking at the European Parliament. Sylvie Goulard (ALDE, France) said the CCPs should be governed in the future by genuinely European supervision and her views were echoed by French Green MEP Pascal Canfin, who said that ESMA's powers were far too restricted because the risk that was formerly scattered around behind the scenes would now be concentrated in CCPs, which therefore should be monitored at EU level. He regretted the fact that the UK's views had finally won the day.
Pension funds. Few financial operators will be exempt from the new rules. Langen said that central banks and clearing houses will be exempt, while pension funds will have a transition period of up to six years. The committee chief welcomed the fact that pension funds would be exempt for a while, which would ensure that pensioners would not see a cut in their returns on investment. In this domain, the EU differs from the US, which has more relaxed collateral requirements.
Pleased that the EU is moving forward with the derivatives legislation, EU Internal Market Commissioner Michel Barnier said: “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”. Langen said there were political problems with the United States because of delays in transposing the Dodd Frank Act, but he said this was likely to be resolved soon after the upcoming American presidential election. (MB/transl.fl)