Derivatives: Parliamant and Council agree on tough EU standards

Financial market transactions in derivatives worth trillions of Euros will soon be subject to strict EU standards. Representatives from Parliament and Council agreed on the future EU Regulation last night. "We will see some major progress in terms of transparency and risk mitigation in the derivatives market. Any derivative transaction will have to be reported to a special transparency register", said European Parliament Rapporteur Werner Langen MEP.

There will only be very few exceptions to the clearing and reporting requirement, such as for the European Central Bank, the Bank for International Settlement and end-users, such as companies who use derivatives to secure the acquistiion of raw materials or that of long-term contracts. The authorisation and supervision of central counter-parties (CCPs) will be subject to the national supervisors, the European authority ESMA will be in charge of the transparency register.

If the bodies of national supervisors raise concerns over the registration by a two-third majority, ESMA will have the final say. It is the European Parliament who secured this provision and further provisions on reporting requirements and a sunset-clause.

With the future standards, the EU regulates what is the most non-transparent and risk-bound part of the financial market. According to the Bank for International Settlement, derivatives account for 707 trillion US dolllars a year, the major part playing currency derivatives, interest derivatives and credit-default swaps (CDS). Derivatives on raw materials and shares only play a minor role.

The so-called OTC (over-the-counter) derivatives were a major source of the global financial market crisis as there were and still are neither transparency nor own-capital requirements. On the day Lehman went bankrupt, only 1.24% of inter-bank derivative transactions were known to the US aurhorities. The plenary of the European Parliament will formally adopt the new EU Regulation on 13 or 14 March.