Saturday, September 20, 2014

EU Takes Big Step Toward Regulating Huge OTC Derivative Contracts Market

BRUSSELS—Regulation of the trillion dollar derivatives market in the European Union cleared an important hurdle May 24 when the European Parliament’s Committee for Economic and Monetary Affairs approved a version of legislation calling for over-the-counter derivative contracts to be centrally cleared.

The proposed rules, which still must be approved by the Parliament and then be accepted by the EU member states in the Council of Economic and Finance Ministers, would exempt corporate derivative contracts used by companies to hedge against currency and interest fluctuations. The rules also include a special regime for pension funds as long as national capital requirements provide a guarantee similar to cleared contracts.

However, the Parliament committee version of the bill would not require central clearing of derivative contracts traded on exchange—a demand that insisted on by some EU member states, led by the United Kingdom, where most EU derivatives markets are based. The United Kingdom believes that, with all derivatives trade requiring central clearing, more competition would be stimulated in the central clearing party sector.

The issue of competition for central clearing parties has become especially important in the wake of the proposed merger between the New York Stock Exchange and the German-based Deutsche Borse. The two exchanges own the two largest derivatives exchanges—an issue that has raised red flags for EU antitrust officials.

Although the Financial Stability Board recently complained about the slow pace for derivatives regulation reform in the EU and the United States, the Parliament committee rejected an option to go for a quick agreement with the EU member states. Instead, the sponsor of the legislation on the committee gained the support to put the vote before the European Parliament General Assembly in June…

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