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The new regime, which could be largely in place by the end of 2012, will overhaul a market that boomed in the decade before the economic crash and was blamed for amplifying the crisis by hiding risks from regulators. Under new EU laws, banks, hedge funds and other buyers and sellers of derivatives will be encouraged to move away from the unregulated 'over-the-counter' market, which accounts for almost 95 per cent of all trades.
"The era of opacity and shady deals is over", said Michel Barnier, the European commissioner in charge of writing these and other new rules to reform finance. "It is a key step in our effort to establish a safer and sounder regulatory framework for European financial markets."
In the past, it has been common for multi-million-euro contracts to be recorded by no more than a fax, with only the parties involved aware of the details. This will change under the new law, which would standardise most trading so it happens on open exchanges. Settlement of such deals will be cleared centrally, making them easier to monitor.
Those that do not shift to exchanges or a central counterparty such as LCH Clearnet in London, which acts as an intermediary between buyer and seller, will face higher capital charges to reflect the extra risk.
Some analysts see risks in the new regime and think regulators will be overwhelmed by trying to follow such a huge market. "By centrally clearing trades, you concentrate risk dramatically into one body, such as a central counterparty", said Graham Bishop, who advises banks on European financial policy. "We have to be careful these bodies don't become a financial nuclear bomb."