26/05/2011
By Matt Ritchie
New legislation to regulate the trade in derivatives has progressed this week, with a vote by the European Parliament’s Economic Affairs
In a statement, the parliament said the draft regulation covers over-the-counter derivatives (OTCs), central clearing parties (CCPs) and trade repositories, and aims to bring greater safety, transparency and stability to the OTC derivatives market, which was valued at around €425 trillion in 2009.
Under the proposed regulation, information on OTC derivative contracts would have to be reported to trade repositories and be accessible to supervisory authorities. OTC derivative contracts would need to be cleared through CCPs, thus reducing counterparty credit risk.
It is also envisaged the new European Securities and Markets Authority (ESMA) would play a key supervisory role.
MEPs have rejected suggestions by some EU member states that all derivatives should be governed by the regulation, deciding that only OTC derivatives should be covered. However, to ensure ESMA has the “full picture”, they want reporting obligations to apply to all derivatives.
While the committee's report, drafted by Werner Langen, is strict regarding exemptions to the clearing obligation there will be a special regime for pension funds provided the national capital requirements provide a guarantee similar to cleared contracts.
Specifically, the draft regulation states that for pension scheme investments under IORP, or schemes where the law of the Member State recognises the scheme for retirement planning, resilient bilateral collateralisation of derivatives used for risk mitigation shall take account of counterparty creditworthiness.
Capital requirements in prudential regulation shall be in line with those of centrally cleared contracts.
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