21 October 2009

Commission sets out future actions to strengthen the safety of derivatives markets

The Commission has adopted a Communication on derivatives markets. In 2010 it will come forward with legislative proposals in line with the G20 Pittsburgh statement. The communication will be accompanied by a thorough impact assessment.

The Communication sets out future policy actions to increase the transparency of the derivatives market reduce counterparty and operational risk in trading and enhance market integrity and oversight. It follows the stakeholder consultation launched with the Communication in July and the public hearing in September. The Commission will come forward with legislative proposals in 2010. These proposals will be in line with the G20 Pittsburgh statement and will be accompanied by a thorough impact assessment. In order to avoid any risk of regulatory arbitrage and to ensure a global consistency of policy approaches, the Commission stands ready to work with authorities around the world in order to finalise the proposals.

Internal Market and Services Commissioner Charlie McCreevy said: "This Communication marks a paradigm shift away from the traditional view that derivatives are financial instruments for professional use and thus require only light-handed regulation. The Commission proposes a comprehensive approach that will ultimately enable markets to price risks properly. We cannot afford another situation where the risks of the financial sector are ultimately borne by the taxpayer." The future policy actions will:

·         reduce counterparty risk by (i) proposing legislation to establish common safety, regulatory and operational standards for central counterparties (CCPs), (ii) improving collateralisation of bilaterally-cleared contracts, (iii) substantially raising capital charges for bilaterally-cleared as compared with CCP-cleared transactions, and on top of this (iv) mandating CCP-clearing for standardised contracts;

·         reduce operational risk by promoting standardisation of the legal terms of contracts and of contract-processing;

·         increase transparency by (i) mandating market participants to record positions and all transactions not cleared by a CCP in trade repositories, (ii) regulating and supervising trade repositories, (iii) mandating trading of standardised derivatives on exchanges and other organised trading venues, and (iv) increasing transparency of trading as part of the review of the Markets in Financial Instruments Directive (MiFID) for all derivatives markets including for commodity derivatives;

·         enhance market integrity and oversight by clarifying and extending the scope of market manipulation as set out in the Market Abuse Directive (MAD) to derivatives and by giving regulators the possibility to set position limits.

 

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