Council agrees need to improve mitigation of counterparty credit risk, focusing, in particular, on promoting clearing of eligible derivatives by means of one or more central counterparties, subject to adequately harmonised regulation and supervision.
The Council adopted the following conclusions:
1. ‘The Council RECALLS the Conclusions of the European Council of 18/19 June 20091, where the European Council called for ‘further progress to be made in the regulation of financial markets, notably on (…) transparency and stability of derivatives markets.’
2. It RECOGNISES the global dimension of derivatives markets and the need for a level playing field, as agreed by G20 leaders at their meeting on 25 September 2009, where they called for ‘Improving over-the-counter derivatives markets. All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. ‘
3. The Council STRESSES the importance of the two related workstrands set out in the ECOFIN roadmap adopted by the Council (ECOFIN) on 20 October as an annex to its conclusions on strengthening EU financial stability arrangements3, namely:
– ‘Increasing the safety for ‘over the counter’ derivatives markets, by the clearing of standardized OTC derivative contracts through central counterparties and, if not, higher capital requirements; the reporting of non-standardized derivative contracts to trade repositories’;
– ‘Improving transparency in the use of derivatives’.
4. The Council broadly WELCOMES the future actions announced by the Commission in its Communication ‘Ensuring efficient, safe and sound derivatives markets - Future policy action’. On that basis, the Council, bearing in mind the aforementioned declaration of G20 leaders in Pittsburgh:
5. It broadly WELCOMES the paradigm shift in the approach towards derivatives markets suggested by the Commission, namely moving from so-called ‘light-handed regulation’ to a more ambitious and comprehensive regulatory policy aimed at reducing counterparty and operational risks, increasing transparency of the derivatives market and strengthening market integrity and oversight and, operationally, is expected to shift derivatives trading and clearing from predominantly OTC bilateral transactions towards centralised trading and clearing infrastructures;
6. It STRESSES in that respect, as noted by the Commission, the need to have a comprehensive policy on OTC derivatives in order to avoid regulatory arbitrage and, at the same time, to take into account differences across classes of instruments and contracts, as well as those of specific market participants, including non-financial firms and commodity markets, e.g. for gas and electricity. Any future policy option should ensure that non-financial institutions can continue managing the risks inherent to their business without incurring disproportionate costs; and where appropriate should allow them to tailor risks to individual needs, subject to proper risk mitigation techniques and internal controls, but without underpricing risks nor opening regulatory loopholes.
7. It AGREES with the need to improve substantially the mitigation of counterparty credit risk, and focusing in particular on:
a. Promoting clearing of eligible derivatives by means of one or more central counterparties (CCPs) which should be subject to adequately harmonised regulation and supervision and oversight to ensure improved safety and soundness.
8. The Council WELCOMES the joint CESR-ESCB Recommendations for Central
Counterparties in Europe and broadly WELCOMES the Commission's intention to work on appropriate legislative proposals addressing, in particular, five issues, namely, conduct of business and governance, risk standards, legal protection to collateral and positions, authorisation and recognition of third-country CCPs.
Taking into account (i) the pan-European reach and systemic importance of CCPs and (ii) the fact that CCPs may ultimately be supported by fiscal authorities, the Commission should propose appropriate institutional responsibilities;
b. Recommending the use of CCPs located in Europe, the Council RECOGNISES that there are strong reasons for some CCPs being located in Europe, relating to regulatory, supervisory and monetary policy concerns.
c. Accordingly, mandating CCP clearing for clearing-eligible derivatives. The Council, however, RECOGNISES that there are limits to the scope of potential standardisation, and that non-standardised OTC derivative contracts will therefore remain necessary. P roper arrangements, therefore, need to be in place to fulfil the aforementioned objectives of transparency and safety for the OTC derivatives markets;
d. Consequently, requiring proper collateralisation for bilateral clearing, and making it subject to higher capital charges than centrally cleared trades, taking into account the risk-mitigating effect of collateral arrangements and other measures, as well as the impact on the corporate sector. The Council INVITES the Commission to conduct comprehensive impact assessments and reflect the principle of higher capital requirements for bilateral OTC contracts, as agreed at G20 level in Pittsburgh, in future amendments to the Capital Requirements Directive (CRD). The Commission should take into account the technical solutions being developed under the aegis of the Basel Committee.
The Council AGREES with the importance of improving transparency, efficiency and integrity for derivative transactions, focusing in particular on four issues:
a. Mandating reporting of transactions to trade repositories, to be then provided to regulators. The Commission should work towards proposing a Common legal framework for the regulation, supervision and oversight of trade repositories, including the roles and functions that may be given, for example, to ESMA within the overall supervisory framework;
b. European regulators' and Central banks' access to information stored in trade repositories. The Council CONSIDERS that European regulators and Central banks must have unfettered access to complete global information. In the absence of such access to information in repositories located in third countries, the Council WOULD ENCOURAGE the creation and operation of European-based trade repositories;
c. Ensuring that all relevant trades eligible for exchange-trading take place on organised markets;
d. Enhancing pre-and post-trade transparency requirements as appropriate.
The Commission should include these issues in its review of the Directive on Markets in Financial Instruments (MiFID).
9. The Council broadly WELCOMES the Commission's intention to work on mitigating operational risk and, within the context of the forthcoming review of the MiFID and of the Market Abuse Directive (MAD), to revise relevant legislative provisions underpinning market integrity and oversight.
10. Overall, the Council broadly WELCOMES the Commission's intention to put forward, or revise as appropriate, several legislative proposals (i.e. a possible Proposal on CCPs, amendments to the CRD; the reviews of MiFID and MAD). The Council RECALLS in that respect the common/inter-institutional commitment to better regulation and INVITES the Commission to carry out a thorough impact assessment for the legislation to be proposed, working towards addressing the needs of all concerned stakeholders and seeking consistency with existing or emerging international standards, whilst respecting the aforementioned overarching principles of market transparency and financial stability.
Clearing and Settlement.
11. In the field of clearing and settlement for cash equities, as clarified by the Commission report on the Code of Conduct, the Council NOTES the progress made in terms of increased efficiency and reduced costs for investors, in particular, as regards cash-equity CCP-clearing.
The Council AGREES with the conclusion that further steps need to be taken to address the issues related to risk and regulatory barriers highlighted by the Code of Conduct. The Council TAKES NOTE of the ongoing work aiming at increasing legal certainty of securities holding and transaction. It INVITES the Commission to present its draft legislation on securities law as soon as possible.
12. The Council INVITES the new Commission to continue work with the industry to resolve remaining challenges as regards price transparency and comparability, commercial and operational barriers to links and access and service unbundling in the post-trade sector.
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ECOFIN council conclusions 2 Dec.pdf
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