Cause and Effect in European Politics and Law

The European Parliament and the Council Open Negotiations on the OTC Derivatives Regulation

Ralitsa Kovacheva, Desislava Dimitrova, October 10, 2011

The Council of EU finance ministers (ECOFIN) has approved a general approach on a draft regulation on OTC (over the counter) derivatives, central counterparties and trade repositories. Thus, even without an unanimous agreement among EU member states, it has enabled the Presidency to start negotiations with the European Parliament, in order to reach an agreement at first reading.

The draft directive has been proposed by the European Commission last September. It provides for the traders of OTC derivatives in the EU to report their deals to central data centres, known as trade repositories. They, in turn, will communicate it to the future European Securities and Market Authority (ESMA). For the sake of greater certainty, the Commission proposes the OTC derivatives that are standardised (i.e. they have met predefined eligibility criteria, such as a high level of liquidity), to be cleared through central counterparties (CCPs). The aim is to prevent a default of a player to cause a "chain reaction" that would endanger the entire system.

The European Parliament approved its position in early July. Then the parliamentary rapporteur on the OTC derivatives, Werner Langen (EPP, Germany), explained that "despite the efforts of the Hungarian Presidency, the Council has not yet achieved an overall political agreement on this sector," and there were still significant differences between Parliament and the Council. They are related mainly to the scope of the new rules, as the Council wants all derivatives to be included in the clearing, even those traded on stock exchanges, while the Parliament considers that there should be some exemptions. The issue is getting more complicated, given the request made by the American Congress the EU to exclude of this regulation the small and the savings banks, although the US government does not have a majority for this proposal, Mr Lange explained. In this sense, there is also the issue of recognition of clearing houses from third countries - particularly with the US we insist on reciprocity, the rapporteur said.

Another controversial point is how to treat pension funds. The role of the ESMA is also a subject of controversy between Parliament and Council. "The national authorities should keep their responsibilities, but they should be strengthened by having a single interpretation of the rules for all," Werner Langen noted.

The issue is particularly sensitive in the UK. EurActiv quoted a diplomat close to the negotiations as saying that London insisted national regulators, not European ones, to remain in charge of clearing most of the trades. The United Kingdom also believes new rules should apply to all derivatives not only to the OTC derivatives. On the occasion of the wording that the Council of finance ministers has reached "unanimity minus one" on the issue, the diplomat said: "As a country with three quarters of the EU's business in derivatives trade and 50% of global trade, we think that this 'unanimity minus one' doesn't really hold". He said any attempt to pass the legislation without London's consent would trigger uproar among parliamentarians and the British press and will make the adoption more difficult.

France, in turn, currently chairing the G20, wants to achieve consensus on the legislation in order to present it at the G20 finance ministers meeting in October, and then at the G20 summit in Cannes in November.