Banks, brokers and other financial market players are warning that proposals being considered by lawmakers could reduce the efficiency of European securities markets. But MEPs who are advocating the changes claim they are essential to guard against “new systemic risks... for the entire financial system,” setting the stage for a long battle between the industry and lawmakers.
The concerns centre on a parliamentary proposal to slash the so-called “interoperability” section from planned rules being put forward by Brussels, which would require traders to clear centrally a large portion of their derivatives contracts. European Union officials have proposed these rules to bring more transparency and security to the huge over-the-counter derivatives market – where deals are conducted bilaterally – in the wake of the financial crisis that started in 2008.
Under the planned rules, traders and investors must report trades speedily and clear most deals via an authorised “central counterparty” (CCP). Each CCP must meet standards for liquidity and capital, and because it would be able to net off a large number of mutual trades, residual risk would be cut. The dispute centres on the extent to which there should be interoperability arrangements between CCPs. In its original proposals, the European Commission acknowledged that these could help integrate the trading market in Europe, but also recognised that they could expose CCPs to more risk.
Werner Langen, the German MEP who is steering this legislation through the European Parliament, now wants to remove interoperability from the rules entirely, and simply make this issue due for assessment in three years’ time.
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