OTC transactions on derivative products will require collateral deposits!

The European Union wishes to increase the cost on purely speculative transactions. A proper system would be set up in order to allow non-financial companies to use derivative products for « legitimate» hedging reasons…

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François Baroin, French finance minister, congratulated himself for the adoption by the European Union council of ministers of the general approach on OTC market clearing. “The adoption of this text by finance ministers of the 27 member states is a major breakthrough in the application by Europe of one the main commitments of the G20 that took place at Pittsburgh. The European Union follows the US in the application of its commitments. OTC markets are the biggest in the world. The financial has demonstrated that these markets concentrate systemic risk since they are poorly regulated and not very transparent” he comments.

Consequently, the rule that has been adopted shapes the first European regulatory framework and contains all the constraints that will impact OTC markets. It should allow greater transparency on the markets par imposing that transactions be declared to a central data base. It should moreover decrease systemic by forcing banks and market participants to have their transactions on OTC markets be managed through a clearing house.

All OTC transactions on derivative products should as from now be subject to collateral deposits that will be proportional to the risk taken. This will increase the cost of purely speculative transactions. A system will be adapted in order to allow non-financial companies to use those products for “legitimate” hedging reasons.

“We have validated a project which will at best increase mostly the cost of hedging for companies. There are already not many entities that can manage derivative risk on proprietary accounts and the spreads are now much larger. With the collateral deposits, it should be much worse for the corporates” says a Parisian banker.

The regulation will moreover impose reinforced prudential rules to clearing houses which will soon concentrate risks. This will carried out so as to harmonize the system in all member states. Regulatory bodies will be set which will associate the European Authority of financial markets and the European Central Bank.

All clearing houses offering services in euros in Europe will as from now see the European monetary authorities participate actively to their supervision.

The European authority on financial markets will also have from new powers and in particular the supervision of central databases. The rules are working on a basis that will allow for the adoption of common standards worldwide and particularly with the United States in order to achieve a coherent and global regulation of derivative markets worldwide.

François Baroin now wishes that negotiations start actively with the European parliament in order to conclude the text by the end of 2011. This will allow the European Union to fulfill its commitment that was taken at the G20 by 2012. These negotiations with the European parliament will be represent the opportunity to analyze more deeply European supervision of clearing houses and thus limit the range of some exemptions especially regarding pension funds.

Next Finance October 2011

Article also available in : English EN | français FR

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