Council clears derivatives regulation
By Manon Malhère | Thursday 05 July 2012
From the end of 2012, standardised over-the-counter (OTC) derivatives contracts will be subject to central clearing in order to reduce the risk of default by one party to the contract (known as counterparty risk). On 4 July, the Council cleared (written procedure) the compromise text negotiated with the European Parliament over close to 18 months on OTC derivates, central counterparties (CCPs) and trade repositories. The text submits all derivative contracts, not just OTCs, to the obligation to be reported to trade repositories (ie central data centres).
The EP approved the agreement in plenary session on 29 March.
Derivatives are contracts whose value fluctuates according to the price of the asset they refer to. The asset is called an underlying asset and can be a bond, a stock, a currency or even an index. Derivatives offer protection against financial risks, such as price volatility on financial markets.
The proposed regulation was presented by the European Commission in September 2010. Its aim is to further regulate OTC derivatives, ie those that are not on regulated markets (stock market). These markets lack transparency and are considered to have largely contributed to the financial crisis. In 2009, they were valued at €425 billion.
The text, as agreed by the EP and the Council, lays out firstly that ‘standardised’ OTC derivative contracts (declared to be subject to a central clearing obligation) should be compensated by CCPs. CCPs act as an intermediary between the seller and the buyer, which absorb the risk in case of default of one of the two. Above all, the EP has obtained that all derivatives, and not only OTCs, will have to be declared to trade repositories within 24 hours of the transaction.
It is worth noting that development banks, cooperative banks, small banks, pension funds (for six years, subject to conditions), final users (companies that use derivatives as guarantees against legitimate risks, such as oil price increases), EU bailout funds and intragroup transactions are exempt from the clearing obligation.
Furthermore, the regulation grants specific powers to the European Securities and Markets Authority (ESMA). Namely, the ESMA will intervene as a mediator during disputes between national regulators with regard to the registration of CCPs – but only if a majority of regulators give their approval.
The text submits all derivative contracts, not just OTCs, to the obligation to be reported to trade repositories