Europe Shielded From Lehman-Like Blow Three Years After the U.S.

  • Largest EU swaps traders must direct trades to clearinghouses
  • Rules come into effect Tuesday, after G-20 directive in 2009

Europe is finally catching up to the U.S. in safeguarding derivatives trading.

It took the U.S. four years. The European Union needed almost seven. Now, the largest traders of interest-rate swaps in the 28-nation club must from Tuesday direct their trades to clearinghouses -- third parties that guarantee a trade won’t fail if the other party to the transaction collapses.

After the 2008 collapse of Lehman Brothers Holdings Inc. threatened to ensnare other investment banks, Group of 20 leaders the next year directed both U.S. and European regulators to make derivatives safer. The G-20 said lenders should process their trades through clearinghouses to protect losses at trading counterparties in the event of any future toppling of banks.

LCH, the clearing arm of London Stock Exchange Group Plc, and CME Group Inc. will be the biggest beneficiaries. The two firms already account for the vast majority of cleared, over-the-counter derivatives trades in the EU.

For an explainer of international efforts to regulate derivatives, click here.

Big trading firms will now have to clear four of the most common types of interest-rate swap: so-called “plain vanilla” contracts, basis swaps, forward rate agreements and overnight index swaps.

The EU will extend its rules to cover the rest of the market over the next 2 1/2 years. Smaller banks and hedge funds will have to route their trades through a clearinghouse from Dec. 21. Every other type of financial counterparty must start clearing by June 21 of next year. Companies have until Dec. 21, 2018, to switch their trades to clearinghouses.

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