25th Oct 2021

EU and US reach last-minute derivatives deal

  • Derivatives contracts are worth an estimated $630 trillion (Photo: Travel Aficionado)

EU and US financial services officials have reached a last-minute agreement on rules governing the complex derivatives market, after nearly a year of talks between regulators.

The agreement, which will see the sides recognising each other's trading standards, will cover financial instruments and contracts that form a global market worth an estimated $630 trillion (€500 trillion), almost ten times the size of the global economy.

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A joint statement by EU commissioner Michel Barnier and Gary Gensler, chairman of the US Commodity Futures Trading Commission (CFTC), described their systems as "essentially identical" in many respects.

The accord will allow traders to choose which bloc's rulebook to apply when dealing with so-called 'bilateral uncleared swaps' that are too complex to be cleared through a central counterparty. It will also allow US firms to use the EU's trading platforms until March 2014.

The deal, widely seen as a climbdown by Gensler, was struck just hours before controversial plans by the CFTC were due to come into force that would have forced US financial services to comply solely with US swaps rules.

In a nod to Gensler's late change of heart, Barnier struck a conciliatory tone.

"Our discussions have been long and sometimes difficult, but they have always been close, continuous and collaborative," he said

But the agreement will only last until early 2014 with the two parties set to resume talks in January on a future regime.

International regulators have been under pressure to lower risk and improve transparency in the lucrative but often opaque market since the 2008-9 financial crisis.

Derivative contracts allow banks and businesses to hedge against possible losses by tying the value of an investment to the value of other entities such as oil or currencies.

However, they are also used for financial speculation. And although most trades go through a central counterparty, which is responsible for scrutinising and clearing the contracts, the more technical and bespoke contracts are 'uncleared', leading to problems if one party reneges on the contract.

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