The Commission has adopted a Communication on "ensuring efficient, safe and sound derivatives markets" and wants comments on it by the end of August. 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 to reduce risks.
The Communication outlines the tools to ensure OTC products do not harm financial stability as:
- standardisation: To enhance operational efficiency and reduce operational risks. The Commission encourages broader take up of standard contracts and electronic, automated and centralised services;
- central data repositories: To collect data on, for example, number of transactions and size of outstanding positions. This increases transparency, knowledge and contributes to operational efficiency;
- CCP clearing: The Commission says CCPs have proved their worth during the financial crisis so it wants to ensure that clearing of CDS takes place on European CCPs. Industry has as a result committed to achieve CCP clearing by 31 July 2009. If industry is unable to deliver on this commitment, the Commission will have to consider other ways to incentivise the use of CCP clearing. The Commission also wants broader use of CCPs in other OTC derivatives markets, wherever possible; and
- trade execution on public trading venues: For standardised derivatives cleared by a CCP, the Commission asks whether trading these contracts should take place on an organised trading venue where prices and other trade-related information are publicly displayed. This would improve price transparency and strengthen risk management. The Commission will further assess (i) channelling further trade flow through transparent and efficient trading venues and (ii) the appropriate level of transparency (price, transaction, position) for the variety of derivatives markets trading venues.
Commission services have also issued two Staff Working Papers. The first one analyses OTC derivatives markets and the second one is a consultation document containing a more detailed questionnaire.
The Commission plans a public hearing on 25 September 2009, following which it will propose appropriate legislative measures. (Source: IP/09/1083, MEMO/09/314, Com(2009) 332 final and SEC(2009) 905 final)