EC gets tough on derivatives
The European Commission (EC) plans to drive more trading in derivatives onto exchanges and under the gaze of regulators, according to a draft of the proposals due to be released this week.
Critics have blamed this secretive but lucrative market for helping cause the financial crisis.
The European Union’s executive arm now wants to impose tougher rules on such business in an attempt to herd derivatives trading towards central counterparty clearing and by penalising those who trade without such a middleman.
Backers of this plan say when trading is cleared through a central counterparty, which could be run by a bank or exchange, supervisors can more easily see what is happening and spot problems before they become critical. These clearing houses also collect money for the trades, which is used to cover a default.
The EC plans include ensuring financial firms keep more security to cover exposure to derivatives trading and letting watchdogs set position limits to stop violent price swings or runaway betting. The EC wants to bring in these proposals next year, but must convince US President Barack Obama to introduce similar plans to avoid the market moving there.