EU strikes deal on stricter regulation for derivatives

Feb 9, 2012, 18:45 GMT

Brussels - The European Union took another step Thursday towards tighter regulation of financial markets, as new rules were agreed for derivatives, a common tool for speculative trading that has been blamed for contributing to the 2008 financial crash.

Derivatives are used to make bets on the future value of commodities, interest rates or exchange rates. Firms use them to hedge themselves against fluctuations, while banks and other financial institutions profit from them.

At the moment almost 95 per cent of derivatives are traded over the counter (OTC), meaning that they are exchanged privately rather than on a stock exchange.

Under the new EU rules - which were agreed by representatives of the European Parliament and the bloc's member states - OTC derivatives deal will have to be reported to trade repositories, bringing in more transparency.

'The data in these trade repositories will then be available to regulators, giving them a much better overview of who owes what to whom so they can spot any potential problems early and be in a position to take action if need be,' the European Commission said in a briefing note on the deal.

The regulation will also 'considerably increase financial stability and safety in the EU by preventing the situation where a collapse of one financial firm can cause the collapse of other financial firms. We are clearly learning the lessons of the 2008 crisis,' it added.

Agreement on the legislation had been held up by disagreements - first between Britain and France, later between EU governments and EU lawmakers - on the oversight powers to be granted to the EU's market watchdog, the European Securities and Markets Authority.

The final compromise reached Thursday was expected to be formally adopted by the EU parliament and by EU governments over the next few weeks and will not need additional ratification by the bloc's 27 national parliaments to enter into force.

'The era of opacity and shady deals is over,' EU market regulation commissioner Michel Barnier commented in a statement.