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Following a 2009 agreement by the G20 that OTCs should be CCP-cleared by the end of 2012, the adoption of OTC clearing rules in the US Dodd-Frank Act and a series of consultations through 2009 and 2010, the European Commission issued a proposal for a regulation of the European Parliament and of the Council on OTC Derivatives, central counterparties and trade repositories in September.
The proposal would confer new powers on the European Securities and Markets Authority (ESMA) to determine, in collaboration with national authorities, which OTCs should meet the definition of 'standardised' that would require them to be centrally cleared – with a view that the process should "ensure that as many OTC contracts as possible will be cleared."
Following consultation, the proposal describes an exemption for "non-financial (corporate) counterparties" whose derivatives activities are "directly linked to their commercial activity rather than speculation", unless their positions reach "a threshold and are considered to be systemically important".
It remains unclear whether or not pension funds that use interest rate swaps to hedge their liability risks would be classified as "non-financial" counterparties, or even if they were, how many might breach the regulation's as-yet undefined thresholds.
Wouters said there was no doubt a move to centrally cleared OTCs would increase transparency, and he was hopeful that liquidity in long-dated swaps would not be compromised. "It would not be a real problem for our LDI business, but I'm a little afraid it will increase costs," he said. "One of the attractions of OTC derivatives is that they are pretty cost-efficient.
The European Economic and Social Committee (EESC), which "warmly welcomed" the Commission's proposal in its February 2011 response, warned against "overstressing the benefits that CCPs can bring" in the short term, and the "risk of limiting the array of instruments available and pushing up the transaction costs involved in financial activity".