Thursday September 24, 04:26 PM
UPDATE 1-EU executive wary of derivatives trading change
By Huw Jones
LONDON, Sept 24 (Reuters) - Forcing privately negotiated derivatives onto exchanges could contradict other EU laws that promote competition in trading and damage risk hedging, an official with the bloc's executive body said on Thursday.
Turmoil from the demise of Lehman Brothers (NYSE: LEH - news) bank a year ago and the near-collapse of insurer AIG prompted global leaders to call for tougher rules to regulate the vast $600 trillion over-the-counter (OTC (Brussels: OTCB.BR - news) ) derivatives market.
The United States and European Union are debating new rules for the sector, focusing on better transparency and requiring as many of the privately traded contracts to be standardised so they can be centrally cleared to cut risk.
The U.S. wants to go a step further and shift as much OTC contract trading as possible onto exchanges.
U.S. lawmakers say if the EU does not follow suit, European market participants could have an unfair advantage.
'In terms of the European situation, before mandating trading on regulated markets we have to take into consideration the current law,' Maria Velentza, head of securities markets at the Commission's internal market unit.
The EU introduced the markets in financial instruments directive, or MiFID, two years ago to abolish stock exchange monopolies in trading shares and spur competition. It led to alternative trading venues that have lowered trading fees.
Leaders of the G20 group of industrial and emerging market countries meet in the U.S. city of Pittsburgh on Thursday and Friday to refine pledges on beefing up regulation on all parts of the financial market, including derivatives.
Making OTC trading on exchanges mandatory would create a 'discrepancy' with the MiFID rules, Velentza told a meeting of the International Swaps and Derivatives Association..
'We need to take a comprehensive view to avoid imbalances with respect to different financial instruments,' Velentza said.
The Commission recognised the need to avoid a one-size-fits all approach and it was still unclear what standardisation -- which industry fears will kill innovation -- meant, she said.
Sharon Bowles, chair of the European Parliament's economic committee, which would have joint say with governments on any EU law, said the derivatives were not a big factor in the crisis.
'They performed better under stress than might have been expected,' Bowles said. A & (Paris: FR0000075160 - news) apos;one size fits all' approach to regulating the sector may not be appropriate as there will always be a need for bespoke, privately-traded contracts.
Banks began voluntarily clearing credit default swap trades transacted in the EU from July.
The Commission, which has powers to initiate pan-EU financial regulation, is consulting with industry as it prepares to decide on how to supervise derivatives better.
It will host a conference in Brussels on Friday but Velentza said any decisions on possible legislation will be left to the new Commission, due to take office later this year.
The derivatives industry and some of its top customers fear if trading is forced onto an exchange it would be harder to offer the bespoke contracts used to hedge risk.
ISDA chief executive, Robert Pickel, urged a global approach, noting that the U.S. has focused on standardisation of products while the EU was more concerned with standardising processes.
Industry officials said exchanges were pushing their own interests in lobbying regulators for exchange trading of derivatives.
'In fact, mandating that all interest rates swaps or credit default swaps be traded on an exchange is likely to result only in higher costs and increased risks to the manufacturers... who use OTC derivatives in the normal course of business,' he said.
Daniel Trinder, executive director of government affairs at Goldman Sachs (NYSE: GS - news) bank in Europe, said there would be some benefits to exchange trading of some OTC contracts.
'The key is you can't force liquidity where it does not want to go,' Trinder said.
'Clients come to us looking for bespoke solutions. The exchange business is a scale business. I just don't see the possibility of migrating a lot of business onto an exchange,' he added.
'Transparency is not always equal to liquidity,' added Pierre-Emmanuel Julliard of insurer Axa (Paris: FR0000120628 - news) .
Frederik Gentzel, head of prime brokerage for global rates and commodities at Deutsche Bank (Xetra: 514000 - news) said: 'The current proposed regulatory changes are unprecedented in scope and could have unintended consequences, especially for liquidity and overall effectiveness of the system.'
(Reporting by Huw Jones; Editing by Ron Askew and Victoria Main) Keywords: DERIVATIVES REGULATION/
|
|
|
Send Article by Email
Send Article by IM
Blog This with Y! 360
Printable View
