European Union officials and lawmakers brokered a deal on rules to force trading of some over-the-counter derivatives through clearinghouses to safeguard financial markets.
The law, approved after negotiations in Brussels today, will empower EU regulators to decide on types of derivatives that should be centrally cleared. Traders who flout the rules would face penalties including fines. The law also sets rules on management of clearinghouses, including on reserves they must hold to protect themselves from insolvency.
“The era of opacity and shady deals is over,” Michel Barnier, the EU’s financial services commissioner, said in an e-mailed statement. “With this agreement, we are making a big step for financial stability.”
Global regulators have sought tougher rules for OTC derivatives since the collapse in 2008 of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the largest traders in credit-default swaps. Lawmakers have said that clearing firms should also face tougher regulation because a crisis at one of them could threaten the global financial system.
Today’s EU accord “should give an incentive to seek further alignment of rules not just with the U.S. but also with Asia where the regulatory response has been lagging in some areas,” Richard Reid, research director for the International Centre for Financial Regulation, said in an e-mail.
Negotiators on the EU rules sought to address concerns from U.S. banks that they could face discrimination.
U.S.-based companies warned last year that a draft of the law would grant exemptions from clearing rules to derivatives trades between different units of the same bank, but only if these units were both based in Europe.
“We have written the rules in such a way as not to create any friction in what is inevitably a very international business,” Jonathan Faull, director general of Barnier’s internal market department at the commission, said in an interview. “We expect our American friends to enact rules similarly synchronised with us.”
Clearinghouses such as LCH.Clearnet Group Ltd. and Deutsche Boerse AG’s Eurex Clearing operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the threat from a trader’s default.
Negotiators from Denmark, which holds the rotating presidency of the EU, and the European Parliament resolved splits over what powers to give to the European Securities and Markets Authority to authorize and supervise clearinghouses and on how to coordinate the EU rules with measures applied in other nations.
The accord would empower ESMA to settle disagreements between national supervisors on whether a clearinghouse should be authorized.
“Whilst the details around a number of significant issues are still unclear, the language” in the EU deal “leaves a sufficient degree of flexibility for the practical impact to be thrashed out” by regulators, Damian Carolan, a lawyer at Allen & Overy LLP, said in an e-mail.
The deal on the law must be voted on by the European Parliament and signed off by ministers before it can enter into force.
The Financial Stability Board warned last year that nations including EU countries may miss an end-2012 deadline for implementing G-20 agreements on OTC derivatives, and that there is a risk of the rules being applied inconsistently.
The value of outstanding OTC derivatives was about $708 trillion at the end of June 2011, according to the Bank for International Settlements.
Barnier said the EU should now seek a speedy agreement on separate rules that would push more trading of derivatives onto regulated markets.