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EU to crack down on derivative markets

The European Commission has branded the European derivatives market the “wild west” as it looks to crack down on opaque practices in the sector.

In an attempt to follow the US regulatory overhaul of unreported speculative trades between parties, EU commissioner for internal market and services Michel Barnier yesterday announced plans to make over the counter trades more transparent and will also demand more disclosure of short selling.

Barnier said: “No financial market can afford to remain a wild west territory. OTC derivatives have a big impact on the real economy: from mortgages to food prices. The absence of any regulatory framework for OTC derivatives contributed to the financial crisis and the tremendous consequences we are all suffering from.

“We are proposing rules which will bring more transparency and responsibility to derivatives markets. So we know who is doing what, and who owes what to whom. As well as taking action so that single failures do not destabilise the whole financial system, as was the case with Lehman’s collapse.”

The EU is demanding that trades in OTC derivatives in the EU will have to be reported to central data centres, meaning regulators will have a better overview of who owes what and to whom and to detect any potential problems, such as accumulation of risk, early on.

The Commission is also looking to bring in more rules in an attempt to mitigate market risk. It will do this by inserting central counterparties in the middle of trades, thus become the ’buyer to every seller’, as well as the ’seller to every buyer’. The EU says this will prevent the situation where a collapse of one market participant causes the collapse of other market participants.

The commission says at the end of December 2009, the size of the OTC derivatives market by notional value equalled approximately $615trn.

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