Brussels, 26/06/2009 (Agence Europe) - “If industry is unable to deliver on this commitment, we shall have to consider other ways to incentivise the use of CCP clearing for credit default swaps,” warned EU Internal Market Commissioner Charlie McCreevy in Dublin on 26 June 2009, addressing the Irish Institute for Accountants (ICAI). At the end of February 2009, the International Swaps and Derivatives Association (ISDA), representing the interests of major players on the derivatives markets, pledged to set up a central clearing house by the end of July 2009 for CDS (credit default swaps), a market estimated by the Bank of International Settlements (see EUROPE 9844) to be worth more than €30,000 billion at the end of December 2008. Charlie McCreevy said the Commission would be launching a public consultation exercise in the next few days based on a report assessing the functioning of over-the-counter derivatives (OTC derivatives) markets in order to reduce their impact on financial stability through greater transparency and further reduction in
counterparty risk. A public hearing will be held in September 2009 alongside talks with the US authorities, which are making their own suggestions, in order to draw the necessary political conclusions at EU level. Non-standardised derivatives are not traded on regulated exchanges. Instead, they are swapped in contracts between financial bodies. Alongside the lack of transparency, the collapse of the US investment bank Lehman Brothers revealed the dangers to counterparties arising from the domino effect of a key derivatives player gong under.
Basel II. Charlie McCreevy talked about the upcoming review of the directive on own capital requirements for banks, initially announced for mid-June (see EUROPE 9837), saying that the Commission would include remuneration policy in the scope of prudential control. Following the spirit of its two recommendations on executive pay and bonuses in the financial world (see EUROPE 9892), the Commission will suggest giving national regulators the ability to penalise banks for encouraging staff to take excessive risk and focus on the short-term. Discussion is still ongoing over the range and strength of possible penalties (like fines and higher own resources requirements). The commissioner also wants to tackle shortcomings observed in capital requirements for assets held on trading books of financial institutions. “I am particularly keen that we address the shortcomings of the capital requirements for the trading book. And our message is simple: if you want to hold a position on your trading you will need capital to back it. The current crisis showed that when times get rough the risk from the trading book is just a great as it is on the banking book,” explained McCreevy. The Commission's proposals also aim to force investors to display due diligence with regard to complex financial products created by complex re-securitisations. “Our proposals aim to ensure that complexity is inspected, dissected and explained before a position is taken. And in any case there must be more capital going forward for the additional leverage that is created by re-packaging one securitisation into another,” said McCreevy. He announced a further review of the Basel II Directive in the autumn to limit the scale of debt with leverage ratio in banking and thus reduce the level of risk to financial stability. The Commission will require banks to set aside capital provisions in fat years to be used in lean years.
SEPA. Regretting slow progress in implementing the Single Euro Payment Area, the commissioner said he would be publishing a road map in July 2009 with the aim of speeding up implementation of the SEPA. A consultation process is also open, until 3 August 2009, on the utility of setting a deadline for SEPA (see EUROPE 9918). (M.B./transl.fl)