Banks Face EU Fines for Failing to Report OTC Trades
Aug. 31 (Bloomberg) -- David Buik, a market analyst at BGC Partners, discusses the outlook for equities and European Central Bank and Bank of England stimulus measures. He talks with Francine Lacqua on Bloomberg Television's "On The Move." (Source: Bloomberg)
Banks and companies that fail to report trading in over-the-counter derivatives face fines under rules being considered by the European Union.
The draft law would force traders to “report the details of any OTC derivative contract” they have entered into “no later than the working day following the execution” of the trade, according to a European Commission document obtained by Bloomberg News.
The 27 member states of the EU would have to enforce penalties that “shall include at least administrative fines,” for those that don’t comply, according to the plan. “The penalties provided for shall be effective, proportionate and dissuasive,” the document dated Aug. 27 said.
European and U.S. regulators are pushing for tighter oversight of the $605 trillion over-the-counter derivatives market. The EU plan would require more of the products to be traded through central clearinghouses. The commission, the executive arm of the EU, is scheduled to formally announce the proposals next month for discussion with the European Parliament and member states.
The sanctions could create an incentive to direct derivatives trading through firms that aren’t regulated in the EU region, Simon Gleeson, a financial regulatory lawyer at Clifford Chance in London, said in a phone interview.
“You could break the derivatives industry in two,” Gleeson said. “What happens if hedge fund A in the Cayman Islands trades with hedge fund B in the Cayman Islands?”
Limiting Losses
The EU bill is part of a package of laws to strengthen regulation following the worst financial crisis since the Great Depression. The derivatives plan is aimed at limiting losses in the event of a default by a major counterparty.
The proposals to move more OTC trades through central clearinghouses may lead to higher costs for European banks and companies that use the products compared with those in the U.S., according to a European Commission impact assessment dated Aug. 26 obtained by Bloomberg News. The extra costs would stem from the need to post collateral for the trades.
“If the substance of the proposals stay as it currently is, there is a danger that EU market participants may be at a disadvantage with respect to their U.S. counterparts,” the impact assessment said. Under EU rules, policy proposals are accompanied by a report outlining the costs and benefits.
Chantal Hughes, spokeswoman for Financial Services Commissioner Michel Barnier, couldn’t be immediately reached for comment.
Collateral Agreements
Collateral agreements were in place to cover “70 percent of OTC derivatives trades” in 2009, according to the impact assessment, which cites a survey by the International Swaps and Derivatives Association.
“Based on the ISDA survey, approximately $1.4 trillion of exposures in OTC derivatives remain uncollateralized,” the commission report said. “In other words, the amount of leverage in the market is higher than should be the case given the amounts of collateral.”
The draft rules, which are scheduled to take effect by the end of 2012, need to be approved by finance ministers from the 27 member states and members of the European Parliament before they can become law.
To contact the reporters on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net;
To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net
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