Thursday

6th Aug 2020

EU agrees new rules on 'shady' derivatives

  • EU regulations will screen derivative contracts (Photo: Images_of_Money)

The European Parliament, member states and the EU commission on Thursday (9 February) agreed the final text of new rules meant to bring transparecy to the over-the-counter (OTC) derivatives market.

"With this agreement, we are making a big step for financial stability. And we are substantially reducing the risk of a future financial crisis, with all its consequences on the real economy, growth, jobs and public budgets," EU internal markets commissioner Michel Barnier said after clinching the deal.

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"The era of opacity and shady deals is over."

Before the banking crisis in 2008, around €2 trillion of derivatives were bought and sold every day in London alone. The September 2008 Lehman Brothers bankruptcy - widely seen as the start of the financial crisis - was largely due to the derivatives market guaranteeing bets on mortgages and loans that went bust when the US housing bubble burst.

The new regulations aim to increase transparency in OTC derivatives.

Around 95 percent of derivatives are not traded on a transparent exchange but are privately negotiated, with few reporting obligations.

"There are no public prices available, no public information as to who is entering deals with whom, over what period of time, relating to what underlying asset or for which amounts," the European commission has said.

Under the EU rules, supervisory authorities, including the European Securities and Markets Authority (ESMA) in Paris, will be able to scrutinise any European derivative transaction.

All such contracts will have to be reported to central data centres, also known as trade repositories. The repositories will publish and make public aggregate positions by class of derivatives in a bid to reduce the risk of default from anyone involved in the contracts. The ESMA will oversee the trade repositories and grant or withdraw their registration if need be.

Some members of parliament say the deal is not tough enough because it allows governments - at Britain's insistence - to impose a national veto over ESMA reactions.

"At the insistence of the UK, the ESMA would only be able to overrule the decision of a national regulator on the basis of unanimity. Unfortunately, member states were unwilling to ensure EU financial regulation agencies have sufficient and binding powers," said French Green MEP Pascal Canfin.

The European Parliament and member states still need to formally approve the bill before it comes into force.

The new rules will implement - in the EU only - a commitment made by G20 leaders in 2009 in Pittsburgh to reach a global deal before the end of 2012.

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Finance ministers meeting on Tuesday may agree on a compromise deal put forward by the Danish EU presidency on a delayed EU bill regulating trading in derivatives, but the sticking point remains much power a new EU authority can have.

Opinion

UK remains at heart of EU policy-making

Last month's agreement on derivatives regulation flies in the face of those who see the UK as now being on the fringes of European policy-making, writes Mark Hoban.

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