EU’s Swaps Rule Plan May Breach G-20 Accords, Barnier Warns

The European Union’s financial services chief told legislators that a planned overhaul of the bloc’s rules for trading swaps may breach international agreements, threatening EU access to overseas markets.

Michel Barnier, the financial services commissioner, is urging changes to the blueprint which, as it stands, could “lead to an increase of trading of derivatives instruments on dark venues,” undermining agreements reached in 2009 by the Group of 20 nations, according to a letter sent to legislators obtained by Bloomberg News.

European Parliament lawmakers and national officials have introduced too many exemptions into the EU plans, which were presented by Barnier in 2011, according to the letter. As well as allowing many forms of derivatives trading to continue “in total opacity,” the revised legislation would also be a missed opportunity to improve transparency in bond markets, Barnier wrote in the letter dated Oct. 30.

The Group of 20 nations is seeking to toughen and align rules for the $633 trillion market for swaps and other over-the-counter derivatives. The industry became a target for oversight after the 2008 collapse of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the largest traders of credit-default swaps.

G-20 leaders said in 2009 that “all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms,” setting an end-2012 target for that step to be achieved.

Incorrect Interpretation

Barnier is incorrectly interpreting the G-20 commitment, Sharon Bowles, chairwoman of the EU parliament’s economic and monetary affairs committee, said in an e-mail.

“The international accord was focused simply on pushing trades onto regulated markets, and didn’t seek to set rules on pre-trade transparency,” she said.

EU nations clashed last year over how far the EU should go in eliminating exemptions from the bloc’s current financial markets rulebook that allow some types of transactions to escape standard pre-trade disclosure requirements.

Some governments, including Germany and France, sought a tough scaling back of the waivers, in a bid to curb potential market abuse and promote more-regulated platforms. Others, including the U.K., warned that far-reaching changes could be disruptive and have unintended side-effects. They reached a compromise on how they would negotiate with European Parliament lawmakers on the new rules, seeking to retain more waivers than proposed by Barnier.

Overarching Objective

“The overarching objective of the reform of the derivatives markets is to increase transparency,” Barnier wrote. Should EU transparency rules fall short of G-20 commitments, “there is a risk that some G-20 members may assess the EU regime as being less stringent than their own rules and refuse access to EU entities.’

The letter was sent to Markus Ferber, the parliament’s lead lawmaker on the draft legislation, and was sent in copy to six other members of the assembly’s economic and monetary affairs committee, according to the document.

‘‘The lack of transparency in derivatives markets has also protected a handful” of “interdealer brokers from effective competition,” Barnier wrote.

Lawmakers are negotiating on the law with Lithuania, which holds the rotating presidency of the EU.

Barnier also urged lawmakers to “reconsider” their position on transparency in the corporate and sovereign bonds markets “in order to create the conditions allowing the emergence of a market structure that is promoting sound competition and enhancing liquidity.”

Bond Markets

“Like derivative markets, bond markets are dominated by dark trading which hinders effective price formation, and this opacity protects from competition a handful of brokers,” Barnier wrote. Exemptions from transparency that are being weighed by legislators and officials would be “harmful,” he wrote.

Draft laws proposed by Barnier must be approved by the European Parliament and national governments before they can take effect. Legislators and nations are able to amend his plans during negotiations on the final form of these draft laws.

“One of the main aims” of Barnier’s proposals, “was to increase pre- and post-trade transparency across the board, for equity and non-equity markets,” Chantal Hughes, his spokeswoman at the European Commission, said in an e-mail.

“We are concerned about some elements of the text in discussion” as “it seems we we are largely back to status quo,” she said. “We remain confident that we will find appropriate solutions together with the co-legislators.”

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