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Clearing a path through the derivatives maze

Tuesday 13 July 2010 - by Edmund Lakin

It has been a long time in coming but finally the European Commission has outlined its next steps in how it will be regulating the OTC derivative markets. Edmund Lakin takes a look at the latest consultation document

Key players in the derivatives industry have expressed concerns over the lack of clarity on some areas in the European Commission’s over the counter derivatives consultation.

The European Commission, in looking to regulate the OTC derivatives market, is interpreting the G20 call to have all standardised OTC derivatives contracts traded, cleared and reported to trade repositories by end-2012. In addition non-centrally cleared contracts should be subject to higher capital requirements.

The Commission’s consultation document focuses specifically on post trade infrastructure such as defining the eligibility to clear (“standardised” contracts are seen as those that are eligible to clear), requirements for central clearing houses, interoperability arrangements, and reporting to trade repositories.
The explicit focus on post-trade infrastructure may on the face of it seem to ignore part of the G20 statement because it does not seek to deal with pre-trade, but it is widely understood that this area will be dealt with under the upcoming review of the Markets in Financial Instruments Directive scheduled for 2011.

The broad range of market participants are in particular pleased that the Commission is implementing the G20 commitment, but a number of them would have preferred more clarity and more detail from the Commission.


Given the focus recently on the Wall Street Reform and Consumer Protection Act which has finally made its way to the finishing line, and recent changes to infrastructure spending within domestic Asian markets, there are concerns among market participants over regulatory arbitrage and losing business to outside of Europe.

The Commission has now come forward with the view that “standardised” contracts are those that are eligible for clearing by a CCP. In addition they recognise that not all cleared contracts are appropriate to be considered eligible to clear. The Commission is now looking to assess the risks involved with mandatory clearing and is proposing either a bottom up (CCP decision) or a top down (European authorities decision) on what is able to be cleared.


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