The European Banking Federation notes the European Commission’s announcement of its future policy actions in the area of derivatives markets. The Commission’s comprehensive policy on over-the-counter (OTC) derivatives is very much in line with the tools it identified in July 2009 and with the political orientations recently provided by G20 leaders in Pittsburgh.
In order to manage counterparty risk, which the Commission considers as one of the most important shortcomings in the current organization of derivatives markets, the Brussels-based authority intends to make mandatory the clearing of standardised derivatives through a central counterparty (CCP). Non-centrally cleared contracts (i.e. non standardised contracts) would be penalised by making them subject to higher capital requirements. This crucial policy choice - which would have important repercussions on the way financial institutions and their corporate clients conduct OTC derivatives business - is, nevertheless, clouded in uncertainty as the Commission is not defining what contracts can be regarded as standardised.
“The Commission has not tackled the single most important issue identified throughout the consultation period: what is a standard OTC derivatives contract” said Guido Ravoet, Secretary General of the EBF.
He added: “It is a risk to legal certainty to design a regulatory framework based notably on incentives and penalties around a material scope whose borders are blurry and in constant evolution”.
As regards transparency, the Commission is endorsing the G20 agreement that all standardised OTC derivatives contracts be traded on MiFid-defined organised trading venues. Forced trading on regulated venues will certainly increase transparency and reporting obligations (hence costs) for financial institutions, but again, this policy choice is made dependent on that elusive definition of a standard OTC derivative contract.
The EBF welcomes the announcement that the Commission will carry out impact assessments on their future legislative proposals in this area. The Federation looks forward to continue working with the Commission in addressing important open issues in OTC derivatives markets.
© EBF
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