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EU Lawmakers Endorse Clearing Rules for OTC Derivative Trades

The European Union moved closer to adopting measures to force some trading of over-the-counter derivatives through clearinghouses in a bid to safeguard financial markets.

Lawmakers in a European Parliament committee approved proposals to empower the European Securities and Markets Authority to decide on types of derivatives that should be centrally cleared. Traders that flout the rules face penalties including fines.

OTC derivatives lack transparency and “can make it difficult to identify the nature and level of risks” that banks and other companies are taking, the lawmakers said in a report approved by the Parliament’s Economic and Monetary Affairs Committee in Brussels today.

Regulators from the Group of 20 countries have sought to toughen rules on OTC derivatives such as credit-default swaps after the failure in September 2008 of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the largest CDS traders. The G-20 said trades should pass through clearinghouses and be logged in trade repositories.

Clearinghouses -- such as Eurex Clearing and London’s LCH.Clearnet Ltd. -- operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the risk that a trader defaults on a deal.

Lawmakers in the Parliament voted that clearinghouses should have to hold capital of at least 10 million euros ($14.1 million) to absorb possible losses.

The European Commission made proposals in September to implement the G-20 agreement in the 27-nation EU. The region’s governments and the Parliament must agree on the rules before they can enter into force.

The Financial Stability Board, which brings together central bankers, regulators and finance-ministry officials from the G-20 countries, warned last month that nations were taking too long to implement the derivatives rules.

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