23rd May 2022

Deal sought on delayed EU derivatives law

  • There is still discussion about the exact role of the Paris-based European Securities and Markets Authority (Photo: Travel Aficionado)

Finance ministers meeting in Brussels on Tuesday (24 January) may agree on a compromise deal put forward by the Danish EU presidency on a delayed EU bill regulating trading in derivatives, the sticking point being how much power to give to the responsible new EU authority.

The draft law was initially tabled by the European Commission in 2010, two years after the collapse of Lehman Brothers and the bail-out of AIG - financial institutions which had been at the forefront of 'derivatives' trading, essentially guaranteeing bets on mortgages and loans that went bust once the housing bubble in the US burst.

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Once agreed by member states and the European Parliament, the law would make direct trading in derivatives more transparent and traceable, as it would require databases registering every such transaction to be set up in clearing houses that ensure their validity.

MEPs are pushing for the newly appointed EU body, the Paris-based European Securities and Markets Authority (Esma), to have a key role in the process.

London, home to 75 percent of the European derivatives market, has so far opposed Esma being given too many powers, especially when it comes to authorising or rejecting the establishment of clearing houses in a member state - something currently being approved by national authorities.

At a meeting in October, British finance minister George Osborne obtained a concession virtually making it impossible for other countries or Esma to block the establishment of clearing houses in a member state - by requiring unanimity among all except the host country.

Germany, where most of the second type of derivatives - traded through the stock exchange - are taking place, had initially teamed up with Britain but has meanwhile changed course and is pushing for Esma to get a bigger 'mediation' role.

According to a Danish compromise text, seen by EUobserver, the 'unanimity minus one' rule has been kept, but a second option is foreseen so that when a three-quarters majority of states have a negative opinion, they can refer the matter to Esma.

"That decision shall state in writing the full and detailed reasons why the concerned members of the college consider that the requirements of this Regulation or other parts of EU law are not met. In that case the competent authority of the member state where the CCP is established shall defer its decision on the authorisation and await any decision that Esma may take," the text reads.

A meeting scheduled Monday with MEPs dealing with this file has been postponed until the following Monday, pending an agreement among finance ministers.

As for clearing houses themselves, no common position has agreed either. Those acting primarily at a national level - British, German or Italian - prefer the supervision of national authorities "whom they know well", says one market source.

But national authorities can also be politically biased. A Greek authority may reject the application of a Turkish clearing house, whereas Esma would be more "neutral," the source said.

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In the latest part of its endeavour to bring an end to the light-touch regulatory climate that produced the economic crisis, the European Commission has proposed a series of rules intending to shine a light on the until-now murky trading in some of the market's more complicated financial practices: derivatives and short-selling.

EU blocks German take-over of US stock exchange

The EU commission has blocked a merger between Deutsche Boerse and the New York Stock Exchange, the two largest players in derivatives - a financial product blamed for the 2008 financial crisis.

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