Brussels, 15/10/2009 (Agence Europe) - Next week, the European Commission will be publishing a report on the legislation it is planning to unveil in 2010 to better regulate the derivatives markets, worth around €300,000 billion a year. According to a draft document seen by EUROPE, it will suggest harmonising at EU level the national rules that currently apply to clearing houses for derivatives, making it compulsory to archive over the counter markets transactions. The EU Basel II Directive will be altered to increase the capital requirements for the bilateral sale of derivatives, and the MiFID Directive will be altered to ensure that standard contracts are traded on regulated platforms.
According to the Commission, there has to be a paradigm shift to get rid of self-regulation and introduce an approach where legislation will enable the markets to properly assess and put a value on risk in a joined-up approach with work at global level at the G20. This was clearly an issue in the financial crisis - the collapse of the bank Lehman Brothers and the trials and tribulations of insurance giant AIG pulled the veil off a world of secretive trading in derivatives that exposed market players to the risk that one of their trading partners would go under. In July 2009, the European Commission suggested that four areas should be looked into for reducing derivatives risks (see EUROPE 9935). Under pressure from the Commission, the industry agreed to introduce specific compensation solutions in August 2009 for credit default swaps (see EUROPE 9953).
The new legislation has been announced for the summer of 2010. It would cover the work of central clearing houses or chambers (CCC) and the range of products covered by the MiFID Directive (2004/39/EC). It will regulate how CCC business is run and CCC governance (for example, tackling conflicts of interest, risk transparency, procedures and the like); tight risk management rules; legal protection for clients' financial positions on the derivatives markets; and the issuing of an agreement to allow a pan-European service supplier to be set up. The banking regulator of the host country would be responsible for monitoring the CCC's work. There would be special measures recognising the equivalence of rules governing CCC outside the EU with EU legislation.
All standard derivatives will be processed by central clearing houses in the future. Non-standardised contracts will continue to be traded over the counter by players opting for this would have to meet higher capital requirements for such deals. A review of the Basel II Directive at the end of next year will bring this about. The Commission says that this policy could encourage players to submit a wide range of derivatives products through central clearing. A further incentive to make use of CCCs, will be an amendment to the Basel II Directive to force financial institutions involved to deposit an initial margin of capital, along with a daily 'variation margin'.
Transparency. The Commission explains that lack of transparency prevents regulators from properly monitoring risks of bank failures and abuse of derivatives markets and therefore suggests unveiling draft legislation in the summer of next year to make it compulsory for any unregulated derivatives trading to be archived. The new legislation will govern access and involvement in archiving systems and publication, along with the quality of information, frequency of submission and storage details. The EU group of experts on securities will be responsible for licensing archive systems in the EU. The same will apply to non-EU country archive systems which operate in the EU, subject to a European Commission decision on their equivalence. The 2010 review of the MiFID Directive will harmonise rules governance transparency before and after transactions are made. Transparency rules for raw materials derivatives will include measures on the transparency of deals in wholesale energy markets and similar measures are planned for farm derivatives markets.
Revision of Directive 2003/6/EC on insider dealing and market abuse will be used to ensure derivatives markets are covered by EU legislation. The Commission says that it is planning to unveil rules to give regulators the power to restrict excessive price variations or excess concentration of speculation on raw materials markets. (M.B. trans fl)