European Swaps Regulation

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The major institutions in charge of swaps regulation in Europe are the Financial Services Authority (FSA), International Organization of Securities Commissions (IOSCO), Futures and Options Association (FOA), the European Commission, and the European Securities and Markets Authority (ESMA).

Background on European Swaps Regulation[edit]

The financial crisis in 2008 exposed important shortcomings in financial supervision around the world. Because of this, the European Union began to examine their current financial regulatory systems, and decided that their current system of nationally-based supervisory models were insufficient in providing proper oversight. As of Jan. 1, 2011, the European Securities and Markets Authority was established in order to provide cooperation, coordination, and consistent application of regulatory oversight among European countries.[1]

In March of 2010, some European leaders began pushing for a total ban on credit default swaps (financial instruments intended to provide risk insurance to banks and bondholders in case a particular bond or security goes into default). Credit default swaps (CDS) are accused of helping to aggravate the financial crisis in 2008, and have also been blamed for helping to cause Greece's sovereign debt crisis in 2010. European officials have said that they would move ahead with the ban with or without similar US action.[2]

Key Historical Events in European Swaps Regulation[edit]

  • September 2, 1998: The Basel Committee on Banking Supervision and the Technical Committee of the International Organization of Securities Commissions (IOSCO) release a revision of the supervisory information framework for the derivatives activities of banks and securities firms which was originally published in May 1995[3]
  • October 16, 2003: The International Organization of Securities Commissions (IOSCO) released the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (IOSCO MOU), the first global information-sharing arrangement among securities regulators, which calls for international cooperation in combating violations of securities and derivatives laws[4]
  • March 4, 2009: The European Commission calls on EU leaders to further step up coordinated European action to fight the economic crisis, and unveils a comprehensive reform of the financial system based on the de Larosière report[5]
  • May 5, 2009: The International Organization of Securities Commissions published 'Unregulated Financial Markets and Products – Consultation Report', which contains interim recommendations for regulatory action in the market for credit default swaps[6]
  • July 3, 2009: The European Commission adopts a communication, outlining proposed tools for regulating the over the counter (OTC) derivatives markets, including: standardization, central data repositories, central Counter-party (CCP) clearing, and trade execution on public trading venues[7]
  • July 20, 2009: The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) have set up a working group to review the application of central counterparty clearing for OTC derivatives[8]
  • September 4, 2009: The International Organization of Securities Commissions (IOSCO) published 'Unregulated Financial Markets and Products – Final Report', which recommends regulatory actions to assist financial market regulators in introducing greater transparency and oversight with respect to securitization and credit default swaps (CDS) markets[10]
  • October 20, 2009: The EU has announces its proposals to regulate the market for derivatives, and will introduce the legislation in 2010; the commission says it will work with G20 nations to ensure coherence in global policy in clamping down on unregulated derivatives trading[11]
  • January 13, 2010: Michel Barnier, commissioner-designate of Internal Market and Services holds a hearing for the European Parliament on the need to give fresh impetus to the internal market and improve regulation of the financial services industry[12]
  • January 26, 2010: The European Association of Central Counterparty Clearing Houses (EACH) publishes CCP risk management recommendations (2009); the document can be found HERE[13]
  • January 29, 2010: CESR publishes a consultation paper on guidance how to report transactions on OTC derivative instruments; the consultations seeks views by market participants on the proposed guidance by CESR[14]
  • February 1, 2010: The U.S. Securities and Exchange Commission (SEC) and U.K. Financial Services Authority (FSA) hold the 5th meeting of the SEC-FSA strategic dialogue[15]
  • February 24, 2010: Werner Langen MEP, publishes a draft report on over-the-counter derivatives reforms to be considered by the European Parliament’s Economic and Monetary Affairs Committee in its decision on how the European derivatives markets should be regulated going forward[16]
  • March 9, 2010: The Economic Affairs Committee of the European Parliament holds a meeting on the first draft of a resolution on policy measures aimed at ensuring safer derivatives markets; MEPs placed a strong emphasis on how to deal with credit default swaps (CDS). The draft can be found HERE[17]
  • March 16, 2010: CFTC's chairman Gary Gensler speaks at a meeting of the European Parliament's economics committee in Brussels, Belgium on credit default swaps (CDS) and how to regulate them. A transcript of his speech cane be found HERE[18]
  • April 13, 2010: CESR begins overhauling the Markets in Financial Instruments Directive (MiFID) - a European Union law providing harmonized regulation for investment services across the 30 member states of the European Economic Area - by consulting on policy options[19]
  • April 27, 2010: The European Parliament's economic and monetary affairs committee met with specialists from the world of derivatives trading to discuss the steps ahead for better regulation, where they discussed the need to replace over-the-counter dealing with central clearing, so that the price and volume of traded derivatives would be clearer to supervisors and regulators. The video of the meeting can be found HERE[20]
  • May 10, 2010: The economic and monetary affairs committee votes to create three new tightly-integrated supervisory bodies based in Frankfurt that will replace the looser network of supervisors in various European cities originally proposed in order to regulate the EU's financial markets. These proposed authorities are the European Banking Authority (EBA), European Insurance Authority (EIOPA), and European Securities and Markets authority (ESMA)[21]
  • May 12, 2010: The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) issued two consultative reports containing proposals aimed at strengthening the OTC derivatives market[22]
  • June 14, 2010: The European Commission launches a public consultation on derivatives and market infrastructures, which will be open until July 10, 2010, and is the final step before the Commission proposes legislative proposals in September[23]
  • June 15, 2010: The economic and monetary affairs committee approves new rules on derivatives trading, designed to ensure that as many derivatives as possible are traded through open channels that are subject to standards, and also suggested ways to regulate who may trade in credit default swaps and to reduce the regulatory burden on corporate end-users of derivatives[24]
  • June 15, 2010: Werner Langen, MEP of the European Parliament calls for strict legislation and supervision of risk-based derivatives, saying: "What we need is more transparency in the derivatives markets"[25]
  • July 7, 2010: The European Parliament, in an overwhelming majority, votes to back the sweeping reform of the EU's financial regulatory system, with the adoption of amendments to the legislation that will create three European supervisory authorities charged with controlling practices in the banking, securities and markets, and insurance sectors respectively, though they deferred the final vote on the legislative resolution, leaving the door open for a few more weeks for an agreement to be reached at first reading with the Council after the summer break[26]
  • July 23, 2010: The FSA implements new powers granted by Financial Services Act 2010, which gives them far greater power to gather information in relation to financial stability from specified categories, and to impose penalties on individuals and companies that breach short-selling rules. The consultation paper publishing the final rules and guidelines can be found HERE[27]
  • August 2, 2010: The Committee of European Securities Regulators announces a series of proposed measures for developing pan-European access to financial information disclosed by listed entities, and asks for feedback to their proposals through September 24. The consultation letter can be found HERE[28]
  • September 15, 2010: The European Commission proposes new regulations aimed at bringing more safety and more transparency to the over-the-counter (OTC) derivatives market, these proposals include: information on OTC derivative contracts should be reported to trade repositories and be accessible to supervisory authorities, more information should be made available to all market participants, and standard OTC derivative contracts should be cleared through central counterparties (CCPs)[29]
  • September 20, 2010: The Financial Services Authority (FSA) and the US Financial Industry Regulatory Authority (FINRA) enter into a Memorandum of Understanding (MOU) to support more robust cooperation between the two regulators[30]
  • September 22, 2010: The European Parliament gave the final seal of approval to a package of reforms that will create three European supervisory authorities (ESAs): the European Banking Authority (EBA), European Insurance Authority (EIOPA), and European Securities and Markets authority (ESMA), these ESAs will have powers that will stretch much further than the advisory nature of the current system and they will also have the potential to gain further competences, thanks to a strong review clause[31]
  • October 15, 2010: The Technical Committee of the International Organization of Securities Commissions (IOSCO) has formed a Task Force on OTC Derivatives Regulation (Task Force) in order to coordinate securities and futures regulators’ efforts to work together in the development of supervisory and oversight structures related to over-the-counter (OTC) derivatives markets[32]
  • November 16, 2010: The Securities and Exchange Commission (SEC) and the Committee of European Securities Regulators (CESR) met to discuss regulatory reform efforts in the United States and the European Union, in an attempt to design wide-ranging regulatory reforms on a global level; topics include OTC derivatives regulation and credit rating agency oversight[33]
  • December 8, 2010: The European Commission launches a consultation on the review of the Markets in Financial Instruments Directive (MiFID) which has been in force since November of 2007, in order to address shortcomings in the framework. The deadline for replies is February 2, 2011[34]
  • January 1, 2011: The European Securities and Markets authority (ESMA) is created; it replaces the Committee of European Securities Regulators (CESR) and launches its website:
  • January 3, 2011: European Securities and Markets Authority (ESMA) publishes 'frequently asked questions - a guide to understanding ESMA'.[35] The document can be found HERE

Hearings and Testimony on European Swaps Regulation[edit]

Extracts from Michel Barnier's September 15, 2010 Press Conference[edit]

At a press conference in Brussels on September 15, 2010, Michel Barnier, member of the European Commission in charge of Internal Market and Services, presented a proposal for a regulation aimed at bringing more safety and more transparency to the over-the-counter derivatives market.

As part of the European Commission's ongoing work in creating a sounder financial system, the Commissioner also tabled a proposal for a regulation on short selling and certain aspects of credit default swaps (CDS). Its main objectives are to create a harmonised framework for coordinated action at European level, increase transparency and reduce risks.

Some of Barnier's main points in the conference include:

  • The need to not just improve transparency in the derivatives market, but also the global management through standardization
  • The need to encourage centralized clearing of credit derivative swaps
  • The need to create a European approach to banning short selling on a temporary basis
  • The need to limit the risks of intensive speculation by forcing people and companies to be transparent

Michel Barnier's January 13, 2010 European Parliament Hearing[edit]

Michel Barnier, the commissioner-designate for the Internal Market and Services held a hearing for the European Parliment on Jan. 13, 2010. The main topics presented in his hearing were the need to give fresh impetus to the internal market and improve regulation of the financial services industry. MEPs from the economic affairs and internal market committees questioned him on the social dimension of the single market and his ideas for regulating Europe's financial sector in the long term.

Mindful of the French "No" to the draft Constitution in 2005, which he saw as "proof that Europe had strayed away from its citizens", Michel Barnier used his opening remarks to underline his intention of restoring public trust in the European project by "making sure the internal market is about those who live it on a daily basis: citizens, consumers and businesses". Replying to doubts about his impartiality in this area, Barnier said "I will take no orders from Paris, London or anywhere else".

Obeying the rules of the single market

To a question by Christian Buşoi (ALDE, RO) about the tools at his disposal to make Member States apply EU directives within the time limits laid down, Barnier said he favored negotiation rather than binding legal pressures. He planned to visit each of the 27 Member States to discuss with governments and economic and social representatives the slow implementation of the Services Directive. On this issue, Barnier admitted "I was not proud when the tale of the Polish plumber was bandied about in my country. It would be better in any case to speak of the Luxembourg plumber, who has to grapple with four different legal systems if he wants to work in a 40-kilometer radius".

Professional mobility and SMEs The right to live and work in another country is a key freedom that the Commission must defend, argued Mr Barnier. He said he intended to look closely at the problems encountered by Member States in transposing the directive on the mutual recognition of professional qualifications.

On small and medium-sized firms, which account for 80 percent of European businesses and 90 percent of jobs, the commissioner-designate planned to "make life easier for them", for example by introducing a European one-stop-shop to cut red tape and by completing legislation on the European company statute.

The social dimension In his opening remarks, Barnier had said that better living and working conditions and guaranteed access to high-quality public services would be among his priorities for relaunching the single market. "I will work to put the internal market at the service of human progress, fight social dumping and protect services of general interest", was his reply to a number of questions from MEPs, including Evelyne Gebhardt (S&D, FR), on the social dimension of the common market.

Europe's defense "Europe is not doomed to be a subcontractor of the American or Chinese economies. We will need a political Europe and a European defence dimension", said Barnier in answer to a question by Philippe Juvin (EPP, FR) about the fragmentation of the European market in military equipment.

"In an unstable, fragile and dangerous world, we must have a European defence dimension. But we will not advance against the Member States with threats to their sovereignty - we'll move forward with them", he said.

Financial market regulation and international markets Stressing his determination to reform the financial industry, Barnier said "There can be no consolidated European market without a European financial market". With a revision of the capital requirements directive, the creation of deposit guarantee schemes, the regulation of derivatives and measures on the traceability of financial products, he planned to "push through the reform of supervisory arrangements" needed to make Europe "the first region in the world to learn lessons from the crisis."

Peter Skinner (S&D, UK) asked Barnier how he would persuade the EU's international partners to adopt similar rules in the area of financial regulation, so that the world's financial centers had a level playing field.

"We are facing a global crisis", answered the Commissioner-designate. "We must start at home, in Europe, but we must also work with our partners round the world, especially the United States and China, to agree on a common frame of reference". He added "it is in our interest to be open but we must not be naïve".

Financial speculation and derivatives Jean-Paul Gauzès (EPP, FR) raised the question of speculation in commodities. "Speculation in basic foodstuffs is a scandal when there are a billion starving people in the world", replied Barnier. He added "We must ensure markets contribute to sustainable growth. I am fighting for a fairer world and I want Europe to take the lead on that".

Fears for the City of London In reply to sharp criticism from Godfrey Bloom (EFD, UK) about the consequences of regulation for the UK economy and London as a financial center in particular ("Don't kill the goose that lays the golden eggs", said Bloom), the Commissioner-designate answered "It isn't in the interests of the British financial industry to keep undergoing crises caused by a lack of control and supervision." Adam Smith, he pointed out, had said the market cannot function without a sense of fair play.

September 25, 2009 Conference: Derivatives in Crisis – Safeguarding Financial Stability[edit]

On 3 July 2009, the European Commission adopted a Communication on ensuring efficient, safe and sound derivatives markets. The Communication looks at the role played by derivatives in the financial crisis and at the benefits and risks of derivatives markets, and assesses how risks can be reduced. It is accompanied by a Staff Working Paper, which contains an overview of 1.) derivatives markets, 2.) OTC derivative market segments, and 3.) an assessment of the effectiveness of current measures to reduce risks, notably as regards CDS. It is further accompanied by a Consultation Paper, which asks stakeholders and public authorities for their opinion on the policy tools presented in the Communication. The consultation period ended on 31 August 2009. The purpose of this conference is to conclude the consultation.

Keynote Speeches

  • David Wright (Deputy Director General, European Commission, DG MARKT)
  • Gary Gensler (Chairman, U.S. Commodity Futures Trading Commission)

The Economists' View

Regulators and Industry

Panel 1: Derivatives in general

Panel 2: Credit Default Swaps

Commentary on European Swaps Regulation[edit]

MFA's response to proposed regulation of OTC derivatives, central counterparties, and trade repositories[edit]

November 11, 2010

Managed Funds Association strongly supports the European Union’s efforts to promote central clearing and thereby "increase transparency of the derivatives market, reduce counterparty and operational risk in trading and enhance market integrity and oversight", as set forth in the European Commission’s 'Proposal for a Regulation of the European Parliament and of the Council on OTC Derivatives, Central Counterparties and Trade Repositories'. As active participants in the over-the-counter derivatives market, MFA members have a strong interest in promoting its integrity and proper functioning. MFA also believes that a well-functioning OTC derivatives market is essential to the restoration of capital flows, given its critical role in the investment and risk management activities of many market participants.

In this letter, MFA states their opinions on: the definitions of "class of derivatives" and "financial counterparty", eligibility for the clearing obligation, transaction reporting obligations, risk mitigation techniques for OTC derivatives contracts, recognition of third country CCPs, CCP boards and risk committees, CCP participation requirements, segregation and portability for cleared derivative contracts, CCP default waterfalls, CCP collateral requirements and investment policy, default procedures of clearing members, principles for how CCPs should settle their own obligations, confidentiality in trade repositories, and coordination with third-country regulators.

CFA comment letter regarding CESR's consultation paper on standardization and exchange trading of OTC derivatives[edit]

August 16, 2010

Standardization of derivatives currently traded OTC is a necessary step to facilitate greater market transparency through the use of exchanges and other organized, non-discretionary multilateral electronic trading venues. Transparency alleviates information asymmetry, underpins investor confidence and liquidity, and facilitates calculation and monitoring of risk exposures. These factors strengthen the functioning and resiliency of markets and thus benefit both investors and regulators. CFA Institute is therefore supportive of efforts to increase standardization and exchange trading of derivatives.

CFA Institute is supportive of complementary initiatives to strengthen post-trading infrastructure through central counterparty clearinghouses and trade repositories. However, such initiatives are not substitutes for on-exchange trading, which addresses the separate issues of trading transparency, liquidity, and price discovery.

CFA Institute's other positions are that price transparency is one of the most important goals of financial markets, and that investors should have full access to relevant market information. Standardization and exchange trading further these goals.

Newedge comment letter on derivatives and market infrastructures[edit]

July 9, 2010

Newedge believes the need for over the counter derivative reform - throughout the world - is of paramount importance given the harmful role some OTC derivative transactions played during the recent financial crises. As noted by the European Commission, while OTC derivatives can and do play a "useful role" in the economy, they also contributed to the financial turmoil of the recent economic crises by allowing leverage to increase and by interconnecting market participants, a fact which went unnoticed because of the lack of market transparency, resulting from the predominant OTC market structure.

Some of Newedge's stances on OTC derivative reform include: OTC derivative transactions should be cleared through centralized clearing platforms (CCPs), CCP must be open to buy-side participation through qualified brokers, CCPs must have fair and transparent governance structures, and CCPs must have clear and fair default resolution mechanisms.

Federation of European Securities Exchanges (FESE) comment letter on derivatives and market infrastructures[edit]

July 9, 2010

FESE's public consultation on ‘derivatives and market infrastructures’ which results from the problems identified in the OTC derivatives markets and follows the mandate of the G20 leaders’ statement agreed on 25th September 2009. This consultation covers CCP clearing of OTC derivatives, one part of the mandate of the G20. Other upcoming legislative proposals of the European Commission should cover the rest of the G20 mandate, including trading of OTC derivatives on organized venues. FESE argues that trying to meet this mandate through separate legislative proposals may produce unintended consequences and eventually put at risk the implementation of the G20 agreement by end‐2012 at the latest.

The consultation deals with the subject of interoperability in cash equity markets, which is totally unrelated to the financial crisis and was not discussed by the G20 leaders. As explained in the document, in order to meet G20 commitments on time, the Commission should focus the upcoming legislative proposal on the implementation of the G20 mandate. Interoperability for cash equity deserves a separate debate and an appropriate impact assessment. FESE argues that this would be particularly important at a time when security is the priority of financial markets, as a badly designed interoperability framework could put this at risk.

CFA comment letter on CPSS-IOSCO considerations for trade repositories in OTC derivatives markets[edit]

June 25, 2010

By their nature, OTC derivatives markets are not subject to formal transparency requirements and thus these financial instruments are relatively opaque in comparison to those instruments primarily traded on regulated exchanges. CFA believes that enhancing the transparency of OTC derivatives markets is a key step towards strengthening the functioning and resiliency of these markets.

The transparency benefits of trade repositories help underpin investor confidence in OTC derivatives markets and facilitate monitoring of risk exposures. CFA Institute therefore supports the CPSS-IOSCO initiatives in respect of trade repositories.

LSEG comment letter on CESR's recommendations on trade repositories in the European Union[edit]

November 9, 2009

The London Stock Exchange Group (LSEG) agrees that the establishment of trade repositories (TR) could be an important step in the development of tools that allow regulators to have access to more information regarding trading in derivatives markets, and recognize the need to be able to obtain a clear understanding of the size of the market, the number of transactions, the size and risk profile of outstanding positions and their potential impact in the event of a default or systemic failure.

However, LSEG argues that for any system of trade repositories to be fully effective, a critical part of the exercise will be determining the requirements for the system and processes to be applied in collecting and analyzing the information. Material submitted to a TR must be in a standard, consistent format, capable of being interrogated and delivering meaningful and comprehensive reports and analysis, in much the same way (albeit even more complex) as the standardization that will be required for clearing OTC products. Without this, the ability of regulators to build their understanding of the market will be compromised.

ISDA comment letter on CESRs classification and identification of OTC derivative instruments[edit]

October 1, 2009

In this comment letter ISDA states their belief that all trade data on OTC contracts should be made available to regulators, on a post-execution, non-real time basis. One of the key themes in recent regulatory scrutiny of OTC derivatives markets has been the role that trade repositories can play in enhancing regulatory transparency in the OTC derivatives market. ISDA believes that competent authorities should be able to receive relevant information by querying trade repositories. ISDA also sees additional benefits through the use of trade repositories in their potential to limit complexity and inefficiency in the reporting requirements falling on firms.

ISDA also provides additional information and comment from the International Swaps and Derivatives Association (ISDA) related to financial products mark-up language (FpML).

CDWG's response to the European Commission communication on derivatives[edit]

September 3, 2009

This letter represents the views jointly held by the members of the International Swaps and Derivatives Association (ISDA), the Futures and Options Association (FOA), and the European Federation of Energy Traders (EFET). These organizations have been cooperating as part of the ‘Commodity Derivatives Working Group’ (CDWG), with the aim of drafting this joint response. The CDWG is mostly concerned with regulations pertaining to commodity derivatives in this response.

Some of the key points in this letter include:

  • Support for efforts to strengthen the regulatory framework for OTC derivatives where there are clearly identifiable market failures that can only be remedied by regulatory intervention.
  • Remarks on central clearing, standardization, supervision, and transparency in commodity derivative markets.
  • The CDWG believes that basic distinctions between standardization of processes, standard agreements, and the standardization of products need to be made; While standardization of processes may be somewhat welcome, standardization of products would, in risk mitigation terms, be counter-productive.
  • Remarks on strengthening bilateral collateral management for non-CCP eligible OTC derivatives
  • CDWG believes the commodity derivatives sector has no need for a compulsory central data repository, and does not believe that a clear case has yet been made for the establishment of a central data repository, and is concerned that the costs (to the market) of such an initiative would outweigh the benefits in systemic risk terms.
  • Central clearing is a welcome additional risk mitigation tool for market participants, however, the CDWG stresses that it should be left to market participants to decide if, how and where they clear their commodity derivative transactions.
  • CDWG believes the extent to which mandatory transparency requirements should be applied to commodity derivatives markets depends, on the perceived market failure that such requirements are seeking to address. They state that the vast majority of OTC transactions in commodity derivatives are priced with reference to readily observable market prices, and so do not suffer from the pricing and valuation issues which have been associated with problems in some financial markets.
  • The CDWG does not believe that commodity derivatives pose significant systemic risks to the integrity of the market regardless of the trading channel, and therefore does not believe that trading should be restricted in any of the available routes.

ASF, ESF, ISDA, and SIFMA comment letter on IOSCO's consultation report on unregulated products and markets[edit]

June 15, 2009

This comment letter is a collaborative effort on the part of the American Securitization Forum (ASF), European Securitisation Forum (ESF), International Swaps and Derivatives Association (ISDA) and Securities Industry and Financial Markets Association (SIFMA). The commenting associations acknowledge that securitization and CDS markets are systemically important, have featured prominently in the ongoing financial crisis and are relevant to a restoration of function and confidence to the global financial markets. They also acknowledge that regulatory reform in certain aspects of both markets is necessary.

Some of the major opinions expressed in this comment letter are:

  • Globally consistent and harmonized approaches to regulatory oversight of securitization market activities should be undertaken
  • Strong support for steps to improve risk management techniques and practices by all securitization market participants, including but not limited to investors
  • Standardization of CDS market contracts is an appropriate area of regulatory and industry focus that should continue to be pursued
  • Achieving regulatory transparency — providing transparency and effective information-sharing of CDS-related activities among supervisors, taking into account the full range of exposures that a supervised firm faces across the full range of financial products in which it conducts business — should be a key area of regulatory focus

CDWG comment letter to the European Commission on central clearing of commodity derivatives[edit]

May 29, 2009

This letter represents the views jointly held by the members of the International Swaps and Derivatives Association (ISDA), the Futures and Options Association (FOA), and the European Federation of Energy Traders (EFET). These organizations have been cooperating as part of the ‘Commodity Derivatives Working Group’ (CDWG), with the aim of drafting this joint response. The CDWG is mostly concerned with regulations pertaining to commodity derivatives in this response.

For the most part, CDWG agrees in the belief held by the Financial Market Infrastructure unit in the European Commission that central clearing is an extremely useful tool in reducing risk in wholesale markets, including in OTC derivatives markets, and that central clearing has proven its value in the current crisis. However, the CDWG is of the opinion that there are a number of characteristics specific to wholesale commodity markets, and indeed to the commodity firms active in these markets, that negate the need for the European Commission to mandate central clearing, or to incentivize it through alteration of capital rules applying to contracts that are not suitable for central clearing.

Markit comment letter on ESCB/CESR's draft recommendations for central counterparties as amended for OTC derivatives[edit]

April 16, 2009

In this comment letter, Markit is explaining some of the problems they see with the creation of a European data warehouse for credit default swaps (CDS), as well as their recommendations on how to develop transparency through CCPs for CDS transactions. In regards to the creation of a European trade information warehouse, Markit argues that the significant additional costs and operational risks that it would cause would not outweigh the fact that such a warehouse would only provide access to transactions related to European reference entities, not to the entirety of OTC exposures or activities of European financial institutions. Only though appropriate cross-border agreements or legal structures can the global positions of European banks be provided, otherwise regional fragmentation might make it more difficult to achieve supervisory access to other data warehouses.

In regards to CCPs, Markit supports the calls for a wider adoptions of faster and automated affirmation and confirmation of all derivatives trades, supports the recommendation that CCps should only accept assets as collateral that have "minimal credit, market, and liquidity risks", and outlines their recommendations on how to develop methods on how to properly measure and analyze liquidity, operational risk, and transparency in CDS transactions.

ISDA commitment letter on clearing of CDS in a European clearing house[edit]

February 17, 2009

Following the request by commissioner Charlie McCreevy on October 22, 2008 to AIMA, CEA, EBF, ISDA, LIBA, SIFMA, WMBA and representatives from Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan Chase, Morgan Stanley, Nordea and UBS, and in relation to the meeting on December 10, 2008 of the Working Group on Derivatives, the signatories to this letter confirm their engagement to use one or more central counterparties (CCPs) in the European Union once they are established to 1.) clear CCP-eligible credit default swaps (CDS) on European reference entities and indices based on these entities, and 2.) back-load outstanding eligible contracts. Additionally, the signatories to this letter believe that the establishment of the CCPs should be completed as soon as possible before July 31, 2009.

White Papers on European Swaps Regulation[edit]

CESR technical advice to the European Commission in the context of the MiFID review - standardization and organized platform trading of OTC derivatives[edit]

December 21, 2010

In order to further the objectives of the G20, in relation to the promotion of an efficient and sound derivatives market, CESR considers that the current situation is unsatisfactory and proposes that steps should be taken to increase the proportion of OTC derivatives being standardized by asset class.

CESR believes that a higher level of legal, operational and product standardization (including increased use of electronic confirmation systems) can be achieved and would be beneficial for operational efficiency and the reduction of systemic risk. This should be achieved through the development of carefully defined industry targets, with arrangements to monitor the achievement of the targets.

Egmont - Addressing the Financial Crisis: The EU’S Incomplete Regulatory Response[edit]

December 2010

In this white paper, Egmont - The Royal Institute for International Relations in Brussels, evaluates the European efforts to achieve a sound and secure financial system. The first five chapters examine the work completed by European institutions in their efforts to achieve:

  • Better supervision of the financial sector through a new supervisory framework
  • The elimination of gaps in European and national regulation in regards to derivatives, alternate investment funds, credit rating agencies, auditing firms, capital liquidity requirements, and crisis management of financial institutions
  • Confidence in the financial sector again, through packaged retail investment products, guarantee schemes, and new rules that require more information to be shared between lender and borrower
  • Better risk management in financial institutions by aligning remunerations with long-term objectives rather than short-term risk-taking and better corporate governance
  • The elimination of market abuse and wrongdoing, especially in the short-selling of credit default swaps

In concluding, Egmont provides an overall evaluation by discussing whether or not the efforts of the EU will lead to a secure financial system.

ECMI - Shaping Reforms and Business Models for the OTC Derivatives Market[edit]

April 2010

This paper explores the three major sources of disruptive effects in OTC derivatives: liquidity, counterparty risk and legal uncertainty. These risks affect the value chain of a typical derivative transaction and weaken the economic and legal rationale behind their widespread use.

On the policy side, commitments have been made at G-20 level to draft uniform rules on a global scale "to build a safer financial system". This paper finds, however, that in practice, the EU and US proposals lay out divergent roads to meet common objectives and the author warns that such divergences may encourage regulatory and supervisory arbitrage.

Policy options currently under discussion may need further revision. For instance, access to network clearing infrastructures, such as CCPs, can only be made available to a restricted group of eligible derivative products. Mechanisms of adverse selection and moral hazard, then, may at any time affect the efficient functioning of these crucial infrastructures for financial markets.

House of Lords European Union Committee - The future regulation of derivatives markets: is the EU on the right track?[edit]

March 31, 2010

This report examines the European Commission’s Communications on Ensuring efficient, safe and sound derivatives markets.

The House of Lords European Union Committee found that the European Commission's proposals for increasing transparency in the over-the-counter (OTC) derivatives market, through reporting OTC derivatives contracts which are not centrally cleared to a trade repository, will go some way to addressing concerns that the OTC derivatives market is opaque and ineffectively supervised. There was also support found amongst witnesses for increased use of standardized contracts and of central clearing.

However, there are questions as to what types of contracts will be covered by the Commission’s definition of derivatives. A consequence of a wide definition could be to extend application of the regulation to derivatives used by non-financial businesses that have little effect on financial stability.

ICFR roundtable - The future of international OTC derivatives regulation[edit]

November 24, 2009

This report is an outline of the topics discussed at the International Centre for Financial Regulation (ICFR) roundtable in November of 2009. The main points outlined in the roundtable and this report include:

  • An introduction and brief history of derivatives, and the current regulatory landscape for derivatives trading
  • Discussion on the issues within the OTC derivatives market that have led to calls for greater regulation, centralized clearing and exchange-trading
  • A discussion on the potential effects of, and problems with, outstanding and forthcoming regulatory proposals
  • A discussion on any alternatives to the proposed regulations

The Global Derivatives Market - A Blueprint for Market Safety and Integrity[edit]

September 2009

The financial crisis has unearthed deficiencies in less or non-regulated segments of the derivatives market that lack adequate risk management and mitigation as well as the necessary level of transparency. Excessive bilateral exposures with insufficient collateralization were built up in the OTC derivatives market and exacerbated the financial crisis. As market participants in the OTC derivatives market segment are highly interconnected, defaults of system-relevant market participants could have caused disruption within the whole financial system.

In this white paper, the Deutsche Borse Group outlines a blueprint that they feel would effectively reduce the systemic risk in the derivatives market by incorporating the following guidelines:

  • Maximum use of derivatives trading on organized markets
  • Maximum use of central counterparties where trading on organized markets is not feasible
  • Bilateral collateralization of derivatives exposure (preferably handled by a third party) when organized trading or the use of CCPs is not feasible
  • Mandatory registration of open risk positions and reporting standards for all derivative contracts

European Central Bank - Credit Default Swaps and Counterparty Risk[edit]

August 2009

This report sets out four main features of the credit default swap (CDS) market in the EU that deserve attention for financial stability purposes:

  • The CDS market remains highly concentrated in the hands of a small group of dealers, which is European banks’ main concern as regards CDS counterparty risk
  • The interconnected nature of the CDS market results in increased contagion risk
  • CDSs are widely – and increasingly – used as price indicators for other markets, including loan, credit and even equity markets, meaning that these instruments are playing a broader role in the determination of prices
  • The report also highlights the risk factors related to the significant widening observed in sovereign CDS spreads in mid-March 2009

This report also provides an overview of a number of regulatory and market initiatives that are under way with a view to addressing these weaknesses, including details of the latest EU consultation for OTC derivatives, including CDSs, and reviews the various initiatives to establish central counterparty clearing houses (CCPs) for CDSs.

Also See[edit]

Swaps regulation (US)


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