European Commission sets out blueprint for derivatives reform

Source: European Commission

The European Commission has adopted a Communication for ensuring efficient, safe and sound derivatives markets. The Communication sets out future policy actions to increase transparency of the derivatives market, reduce counterparty and operational risk in trading and enhance market integrity and oversight. They follow the stakeholder consultation launched with the Communication in July ( IP/09/1083 ) and the public hearing in September. The Commission will come forward with legislative proposals in 2010.

These proposals will be in line with the G20 Pittsburgh statement and will be accompanied by a thorough impact assessment. In order to avoid any risk of regulatory arbitrage and to ensure a global consistency of policy approaches, the Commission stands ready to work with authorities around the world when finalising the proposals.

Internal Market and Services Commissioner Charlie McCreevy said: "This Communication marks a paradigm shift away from the traditional view that derivatives are financial instruments for professional use and thus require only light-handed regulation. The Commission proposes a comprehensive approach that will ultimately enable markets to price risks properly. We cannot afford another situation where the risks of the financial sector are ultimately borne by the taxpayer."

This Communication lays out the Commission's future policy actions. It builds on the Commission's July Communication 1 ( IP/09/1083 ) and the subsequent stakeholder consultation and high-level conference.

The future policy actions will:


Reduce counterparty risk by (i) proposing legislation to establish common safety, regulatory and operational standards for central counterparties (CCPs), (ii) improving collateralisation of bilaterally-cleared contracts, (iii) substantially raising capital charges for bilaterally-cleared as compared with CCP-cleared transactions, and on top of this (iv) mandate CCP-clearing for standardised contracts;

Reduce operational risk by promoting standardisation of the legal terms of contracts and of contract-processing;

Increase transparency by (i) mandating market participants to record positions and all transactions not cleared by a CCP in trade repositories, (ii) regulating and supervising trade repositories, (iii) mandating trading of standardised derivatives on exchanges and other organised trading venues, and (iv) increase transparency of trading as part of the review of the Markets in Financial Instru in Firu in Financial Instruments Directive (MiFID) for all derivatives markets including for commodity derivatives;

Enhance market integrity and oversight by clarifying and extending the scope of market manipulation as set out in the Market Abuse Directive (MAD) to derivatives and by giving regulators the possibility to set position limits.

The Commission will now start the process of drafting legislation, notably by launching impact assessments, in order to come forward with ambitious legislation to regulate derivatives in 2010.

The market for derivatives is global. To ensure an ambitious and convergent international regulatory outcome, the proposals are in line with the objectives agreed at the G20 meeting of 25 September 2009. The Commission intends to further develop the technical details in cooperation with its G20 partners in order to ensure a coherent implementation of these policies across the globe and thus avoid regulatory arbitrage. Such cooperation is particularly important with the US, which is also in the process of designing a new approach to derivatives markets.


Derivatives play an important role in the economy but are associated with certain risks. The financial crisis - notably the events surrounding Bear Sterns, Lehman Brothers and AIG - has highlighted that these risks are not sufficiently mitigated in the OTC part of the market. In view of the central role played by derivatives markets in the financial crisis, on 3 July 2009 the Commission published a Communication on ensuring the efficiency, safety and soundness of derivatives markets, accompanied by a Commission Staff Working Paper and a Consultation Paper. The consultation resulted in over 100 replies, and 450 participants attended a high-level conference on 25 September in Brussels. The July Communication announced operational conclusions for the end of October, which is the subject matter of the present communication.

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