Parliament calls for Derivatives regulation to apply only to privately-traded derivatives

Work on EU legislation to regulate derivatives trading began officially in the Economic Affairs Committee held on 28 February, with the presentation of a draft report by rapporteur Werner Langen. This report recommends that new rules should govern only privately-traded derivatives, rather than all kinds as proposed by some Member States. I also advocates for limited exemptions and scrapping proposed co-operation arrangements between clearing houses.

European Parliament's rapporteur Werner Langen highlighted his will to reach an agreement within the parts in order to regulate derivatives trading as much as possible to reduce risk, but without setting costs too high for market participants. In this regard, EP rapporteur shares Commission view  to limit the scope of the new rules to over-the-counter (OTC) derivatives, instead of applying them to all derivatives as suggested by some member states.

The draft report also rejects arguments that certain sectors, such as the energy sector or pension funds, should be exempted from the regulation and seeks to restrict exemption possibilities.  During the debate Mr Langen insisted that pension funds should not benefit from a general exemption but accepted that the lesser obligation of bilateral clearing could be envisaged.  

The report is also contrary to the proposal to allow co-operation arrangements between clearing houses, in order to allow traders to choose where their trades are cleared. Such arrangements, which rapporteur fears could cause a build-up of systemic risk, should undergo further assessment and be dealt with in separate legislation.

The draft report accepts that applying clearing obligations retroactively, to existing contracts, would result in legal difficulties and create major problems for counterparties. It does provide however for this possibility with regard to reporting obligations and asks the European Securities and Markets Authority (ESMA) to assess how reporting retroactivity could be introduced if the information in question were essential to the supervisory authorities.

Regulating derivatives markets to tackle excessive financial risks

In 2010 the Commission submitted the proposal for a regulation on OTC derivatives, central counterparties and trade repositories, which is to be adopted by the Council and Parliament under the co-decision procedure. This regulation aims to tackle the lack of transparency and accumulated risks which have been seen as as key factors for financial crisis following the considerable growth in global volumes of derivatives trading since the start of the last decade. In this regard, Commission's efforts have come alongside US regulations which pursue the same goals, a fact which was highlighted at Commissioner Barnier visit to the UE on November 2010. Furthermore, Commission has also launched a public consultation regarding measures to strengthen bank capital requirements for counterparty credit exposures arising from derivatives, repo and securities financing activities.

Derivatives are financial instruments based on a contract between two or more parties.  As their name indicates, their value is derived from other products since the fluctuations in these underlying products affect the resulting value of the derivative.  Derivatives were created centuries ago to protect intensive users of a given product against severe price movements.  Derivatives are also used to insure against fluctuations in exchange rates, interest rates, as well as share prices and, more recently, the risk of a default on bonds (credit default swaps or CDS).