The Danish Presidency of the Council of the European Union has informed that an agreement on the new rules for increasing transparency and safety in derivatives trading has been reached by the Council and the European Parliament. According to the Danish Presidency, the new rules reduce the risk that a crisis-hit financial institution can “infect” the rest of the financial system via derivatives markets. The compromise text will now have to be confirmed by the Parliament as a whole and the Council.

The Council and the European Parliament reached an agreement on the new rules for trading in financial derivatives according to what it was reported by the Danish Presidency of the Council of the European Union. All trades in financial derivatives shall now be cleared by a central counterparty. The central counterparty stands between buyer and seller and guarantees that both parties in a trade are always assured of getting what they are owed, even if one of the parties gets into difficulties. Ministers at the Economic and Financial Affairs Council reached an agreement on the draft regulation aimed at increasing transparency on all derivatives in January 2012.

The Danish Presidency also assured that the new rules creates greater security in the system, where most derivatives trades take place directly between buyer and seller, and where a party is directly exposed if the other party cannot pay. They therefore are a big step towards counteracting future financial crisis, as they reduce the risk of contagion from a crisis-hit financial institution “infecting” the rest of the financial system via derivatives markets.

All derivatives trades will now to be reported to a central register which gives supervisory authorities a much better overview of derivatives markets and reduces uncertainty in the market if a financial institution gets into trouble. In addition, the agreement creates organisational and capital requirements for central counterparties.