EUROPE - The European Commission is planning a clamp down on derivatives trading by introducing restrictive measures in the European Union.
According to a draft communication due to be published this week, the EC said a "paradigm shift must take place away from the traditional view that derivatives are financial instruments for professional use, for which light-handed regulation was thought sufficient, towards an approach where legislation allows markets to price risks properly".
The EC believes a comprehensive policy on over the counter derivatives is needed in order to avoid regulatory arbitrage. It is also looking for increased international cooperation on this issue. To this end, it intends to "develop the technical details in cooperation with its G20 partners, and in particular with the US".
The document also said the EC would ensure rules will distinguish between lower counterparty credit risk contracts, which are cleared on a central counterparty (CCP) clearing house, and the higher counterparty credit risk contracts whose clearing is done bilaterally.
The primary way by which this can be done is to widen the difference of the capital charges between centrally-cleared and bilaterally-cleared contracts contained in the Capital Requirements Directive, the document added.
In addition, the EC intends to propose making it mandatory to clear standardised derivatives through CCPs.
When finalising its proposal, the EC will work with its partners in the G20 to resolve the practical issues related to making the requirement operational. This involves, in particular, defining which contracts can be regarded as standardised for central clearing.
The document concluded it would start the process of drafting the legislation, by launching impact assessments, in order to produce a body of rules by 2010.
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