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Saturday, July 13, 2024 | Back issues
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Big Changes in Store for EU Derivatives Trading

(CN) - Traders in most European over-the-counter derivatives will have to use a central counterparty to clear their trades under sweeping reforms approved by the European Commission and the European Parliament.

The agreement institutes reforms accepted by leaders of the 19 largest economies at a G-20 summit in 2009.

Central counterparties serve as intermediaries between buyers and sellers taking on the credit risk to either party protecting them from default.

Currently buyers and sellers face direct risk of default if the other party cannot pay.

To increase transparency, the rules will require reports of both exchange-based and over-the-counter derivatives trades to trade repositories, which will publish the aggregate positions of all parties.

Over-the-counter derivatives trades, a private deal between buyer and seller, represent 95 percent of the derivatives market. Derivatives are also traded on established financial markets like the Chicago Board of Trade.

A new regulatory body, the European Markets and Securities Supervisor, will approve central counterparties and trade repositories, according to press statements.

There are currently about a dozen central counterparties in Europe and the United States clearing derivatives based on everything from the performance of interest rates to the value of national currencies.

The EU will recognize non-European entities to act as central counterparties if they are based in a country, like the United States, that has an equivalent regime for their regulation.

EU Pension funds will be exempt from the rules for three years. Members of the European System of Central Banks, which are charged with managing public debt, will not be subject to the rules on clearing.

The European Markets and Securities Supervisor can mandate addition to the central counterparty rule of derivatives based on new asset classes as such derivatives emerge.

A plenary session of the European Parliament must still vote on the agreement before the commission can formally adopt it.

Like the regulatory changes in other G-20 nations, the new rules are supposed to be in effect by September.

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