EU nears tougher derivatives rules

By Gabriele Steinhauser

Associated Press

Published: Tuesday, Oct. 4 2011 10:15 a.m. MDT

Delegation members talk with European Commissioner for Economic and Monetary Affairs Olli Rehn, front left, and European Commissioner for Internal Market and Services Michel Barnier, front right, during the EU finance ministers meeting in Luxembourg, Tuesday, Oct. 4, 2011. Eurozone leaders will likely boost the firepower of their bailout fund at a summit later this month, Belgium's finance minister said Tuesday, as a push to impose larger losses on Greece's private creditors appeared to be gaining more steam.

Yves Logghe, Associated Press

Enlarge photo»

LUXEMBOURG — European Union finance ministers on Tuesday took an important step toward making safer the trading of complicated financial instruments that have been blamed for worsening the global financial crisis.

If approved by the European Parliament, new EU rules will require trades in derivatives that are not done on a regulated exchange to pass through clearing houses. Clearing houses act as an intermediary between buyers and sellers and absorb losses if one party defaults on the transaction.

The deals will also have to be registered in new data centers to give regulators a better idea of what is going on in the market and spot risks as they build up.

Derivatives are complicated financial products that allow investors to bet on developments in things like commodity prices or interest rates.

The obscure nature of so-called over-the-counter derivative trades — transactions done bilaterally between banks or other traders — exacerbated the impact of the collapse of U.S. investment bank Lehman Brothers in 2008.

Because no one knew who was owed what by whom, lending between banks and other large investment funds quickly froze up, causing severe liquidity problems for lenders around the world and pushing several of them into taxpayer-funded bailouts.

The ministers agreed on a common position for their negotiations with the parliament despite initial opposition from the U.K.

London had been pushing for exchange-traded derivatives to be channeled into clearing houses as well. The vast majority of over-the-counter derivatives trading in Europe is done in London, and the U.K. feared that its financial center would be disadvantaged if only those trades faced more stringent rules.

However, a last-minute compromise was forged when the European Commission, the EU's executive, promised to soon propose stricter rules also for exchange-traded derivatives.

Trading in derivatives has exploded over the past decade, and their value has surpassed by many times the combined value of all stocks and bonds. About 80 percent of all derivatives trades are conducted over the counter, according to EU data.

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