Bloomberg News

EU Makes Derivatives Deal That Osborne Says Benefits U.K.

October 04, 2011

(Updates with comment from Barnier in sixth paragraph; adds details of proposal starting in 12th.)

Oct. 4 (Bloomberg) -- European Union finance ministers reached an agreement on how to move forward with derivatives legislation in a way that satisfies the concerns of the U.K.

“We came here in a minority, somewhat outnumbered, but through some hard negotiating we have very much improved the directive in the direction that the United Kingdom wanted to see,” U.K. Chancellor of the Exchequer George Osborne told reporters after the meeting in Luxembourg today.

The agreement doesn’t widen the scope of the current derivatives legislation, as the U.K. had sought. Instead, it provides for an EU declaration that forthcoming financial market legislation will cover any derivatives that are not forced into central clearing by the proposal.

Finance ministers agreed to restore a provision that would allow “open access” to clearinghouses for all trades, which had been removed from earlier drafts. Blocking an action by an EU country would require the support of the other 26 member states.

The Group of 20 nations is encouraging greater use of central clearing in a bid to cut some of the risks attached to derivatives trading. The Financial Stability Board has said that clearinghouses should in turn face tougher regulation because a crisis at one of them could threaten the global financial system.

‘Robust Market Infrastructure’

If the derivatives legislation moves forward as planned, “there will be sound, robust market infrastructure,” Michel Barnier, the EU’s financial services commissioner, told reporters. “These clearinghouses need to be robust; they have to be carefully supervised.”

Clearinghouses such as LCH.Clearnet Group Ltd. and Deutsche Boerse AG’s Eurex Clearing operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the threat from a trader’s default.

The agreement “is important to the United Kingdom as the home to 75 percent of derivatives trading in the EU and almost 50 percent of the world’s derivatives trading,” Osborne said. “Our objective throughout has been to implement the G-20 agreement on derivatives and to make sure the single market is respected.”

The EU’s draft rules will mandate what types of derivatives should be centrally cleared. The final version of the law will need to be completed in the negotiations with the European Parliament.

Polish Compromise

Discussions with EU officials and legislators are slated to start on Oct. 10. The goal is to finish the legislation by the end of the year so it can start coming into force next year, EU officials said.

Heading into today’s meetings, a majority of states backed a compromise text put forward by Poland, which holds the rotating presidency of the EU, that would have mandated central clearing only for over-the-counter derivatives. Britain resisted, agreeing with the U.S. that all derivatives, including those traded on exchanges, should be subject to the clearing mandates.

Today’s agreement means the current legislation will cover a broad swath of over-the-counter derivatives, which the EU estimates includes 90 percent of all derivatives trades. Derivatives that don’t meet that definition -- and which aren’t covered by specific exemptions -- will face a central clearing requirement in future legislation. Osborne said the EU will commit to this in a “strongly worded” declaration.

‘Technical Solutions’

The draft legislation introduces a three-year temporary exemption for pension funds that can be extended by another two years. This transition period is designed so that funds can find “technical solutions” to protect pensioners.

Companies like Airbus SAS would be exempt from the clearing requirements for derivatives they use to hedge business risks. The legislation also includes an exemption for trades between corporate affiliates within the EU and with affiliates in other jurisdictions as long as the transactions meet certain conditions and take place in areas where there are central- clearing mandates.

In order to coordinate with laws in other areas, such as the U.S.’s Dodd-Frank financial overhaul, the EU’s bill includes a new clause for international coordination. This clause creates a mechanism for resolving differences with international rules, so that the EU would not have to reopen the whole law to make changes, EU officials said.

‘Significant Improvement’

Today’s deal also addresses negotiations on the role of national supervisors under the new regime. Osborne said today’s talks yielded a “significant improvement” in the draft derivatives legislation.

Osborne said the draft has been adjusted to take into account U.K. concerns about different regulatory treatment for clearinghouses in different jurisdictions. He noted that the U.K. is in the midst of a related legal dispute with the European Central Bank.

“We have inserted into the article of the draft directive an explicit reference to non-discrimination against any member state in any currency,” Osborne said. “Of course we still have our legal action with the ECB, but in terms of the draft directive here on derivatives we have the clearest possible statement of a non-discriminatory location policy.”

--With assistance from Jim Brunsden in Brussels. Editors: Patrick G. Henry, Craig Stirling

To contact the reporters on this story: Rebecca Christie in Luxembourg at Rchristie4@bloomberg.net; Gonzalo Vina in Luxembourg at gvina@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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