Clamping down on the derivatives trade
EU legislation to make trade over-the-counter (OTC) derivatives safer and more transparent was approved by an overwhelming majority in Parliament on Thursday. Derivatives trading is widely believed to have contributed to the global financial crisis. The draft regulation had been provisionally agreed by Parliament and Council negotiators on 9 February.
Obligatory clearing for OTC derivatives, reporting for all derivatives
The regulation lays down that OTC derivative contracts would have to be cleared through central counterparties (CCPs), thus reducing counterparty credit risk, i.e. the risk that one party to the contract may default.
In negotiations, MEPs secured a requirement that all derivative contracts (not only OTC derivatives), would have to be reported to central data centres or "trade repositories", which would have to publish aggregate positions by class of derivatives, thereby offering market players a clearer view of the market.
Strong role for ESMA
The work of trade repositories would be monitored by the European Securities and Markets Authority (ESMA), which would be responsible for granting or withdrawing their registration.
Parliament's negotiators strengthened ESMA's role by making it easier for it to block the authorisation of a CCP to operate on the EU's internal market. They also provided for binding mediation by ESMA in disputes among national authorities over the authorisation of CCPs.
MEPs secured a "light touch" regime for pension schemes with regard to the clearing obligation. For these schemes, the obligation would not apply for three years, extendable by another two years plus one, subject to proper justification.
Recognition of CCPs from third countries
CCPs from third countries will be recognized in the EU only if the legal regime of the third country in question provides for an effective equivalent system for recognition. However, this does not set a precedent for other legislation on the supervision and oversight of financial market infrastructures.
Revision after three years
The Council and Commission also agreed to a proposal by Parliament to have the implementation of the legislation evaluated by the Commission. This evaluation would assess how effectively CCPs are supervised, including supervisory colleges' voting arrangements and the ESMA's role in the process of authorising CCPs.
The Commission will present a report, if necessary accompanied by proposals to Parliament and Council, no later than three years after the regulation's entry into force.
The legislation puts into effect commitments given in Pittsburgh in September 2009 by G-20 leaders. That was about one year after the collapse of Lehman Brothers, a major player in the OTC derivatives market. The OTC derivatives market, which was valued at around €425 trillion in 2009. The legislation will enter into force 20 days after publication in the Official Journal.
The outcome of the vote was: 602 in favour, 23 against and 27 abstentions.
Procedure: Co-decision, first reading