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Brussels, 3 rd July 2009
Financial services: Commission outlines ways to strengthen the safety of derivatives markets
The European Commission has adopted a Communication on ensuring efficient, safe and sound derivatives markets, following a commitment made in the Communication on 'Driving European recovery' ( ). 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. Following the public consultation which this Communication launches, the Commission will host a public hearing on 25 September 2009. Taking into account the outcome of the consultation, the Commission will draw operational conclusions before the end of its current mandate and present appropriate initiatives, including legislative proposals as justified, before the end of the year to increase transparency and ensure financial stability.
This Communication marks another step in the Commission's efforts to strengthen the financial system in view of the failings unearthed by the financial crisis. It responds to the commitment contained in the Communication of 4 March and is fully in line with the principles adopted by the G20 and the recommendations of the de Larosi è re Group. The Commission stands ready to work with authorities around the world to ensure global consistency of policy approaches and to avoid any risk of regulatory arbitrage. Internal Market and Services Commissioner Charlie McCreevy said "Derivatives markets play an important role in the economy but the crisis has shown that they may harm financial stability. As regards credit default swaps (CDS), industry has committed to clear CDS on European reference entities and indices on these entities through one or more European CCPs by 31July 2009. I expect industry to move clearing of CDS to any European CCP that has received regulatory approval for clearing indices and single names by that deadline."
Taking into account the wide diversity of 'over the counter' (OTC) derivatives markets, the Communication outlines the tools to ensure that they do not harm financial stability. These tools, which can be combined with each other, are:
The Communication also highlights the actions already undertaken in response to the financial crisis in the area of derivatives (e.g. CCP clearing for CDS, securitisation, credit rating agencies and hedge funds and other alternative investment management funds, supervision).
T he 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 consultation will be open until 31 st August 2009. Responses can be addressed to firstname.lastname@example.org.
Derivatives play an important role in the economy but are associated with certain risks. The financial crisis – notably the events surrounding Bear Sterns, Lehman Brothers and AIG – has highlighted that these risks are not sufficiently mitigated in the OTC part of the market, especially as regards CDS.
In an accompanying Staff Working Paper, the Commission services assess derivatives markets in further detail. The paper provides an assessment of (i) derivatives markets, (ii) OTC derivatives market segments, and (iii) an assessment of the effectiveness of current measures to reduce risks .
The Communication and the accompanying staff working paper conclude that t he crisis has highlighted how derivatives in general and CDS in particular have created a web of mutual dependence that made it difficult to understand, disentangle and contain risk in the immediate aftermath of a default. The characteristics of OTC derivative markets – the private nature of contracting with limited public information, the complex web of mutual dependence, the difficulties of understanding the nature and level of risks – increase uncertainty in times of market stress and accordingly may undermine financial stability. The Communication therefore outlines ways to strengthen derivatives markets so as to improve financial stability.
More information is available at:
The so-called Trade Information Warehouse, operated by the US Depository Trust Clearing Corporation (DTCC).