EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 15.9.2010 
SEC(2010) 1058 
  
COMMISSION STAFF WORKING DOCUMENT 
IMPACT ASSESSMENT  
 
 
Accompanying document to the 
  
Proposal for a 
 
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 
 
on OTC derivatives, central counterp arties and trade repositories 
  
{COM(2010) 484 final} 
{SEC(2010) 1059} 
 
EN 2   EN TABLE OF CONTENTS 
1. Introduction................................................................................................................ .. 5 
2. Procedural issues and consulta tion of interested parties.............................................. 7 
2.1. Lead DG................................................................................................................... .... 7 
2.2. Political mandate and basis in the work programme ................................................... 7 2.3. Impact assessment and opinion of the Impact Assessment Board............................... 8 2.4. Consultation of interested parties................................................................................. 8 2.4.1. External expertise...................................................................................................... ... 9 
2.4.2. Stakeholder consultation .............................................................................................. 9 2.4.3. Public conference....................................................................................................... 10 
3. Problem definition...................................................................................................... 11 3.1. Problems related to the functioning of the OTC derivatives market ......................... 11 3.1.1. Overview of derivatives a nd the derivatives market.................................................. 11 
3.1.2. The role of derivatives in the financial crisis............................................................. 13 3.1.3. Problem 1: Lack of transparency on OT C derivatives positions and exposures........ 14 
3.1.4. Problem 2: Insufficient mitigati on of counterparty credit risk................................... 16 
3.1.5. Problem 3: Insufficient mitig ation of operational risk............................................... 19 
3.1.6. The problem tree ........................................................................................................ 22 
3.1.7. The combined effect of problems 1, 2 and 3.............................................................. 23 3.2. Economic magnitude of the problem ......................................................................... 24 3.3. How would the problems e volve without EU action? ............................................... 24 
3.3.1. Current initiatives in the area of problem 1 ............................................................... 25 3.3.2. Current initiatives in the area of problem 2 ............................................................... 26 3.3.3. Current initiatives in the area of problem 3 ............................................................... 28 3.4. Treaty base and subsidiarity....................................................................................... 30 3.4.1. Treaty base, competence ............................................................................................ 30 3.4.2. Subsidiarity ............................................................................................................ .... 31 
4. The objectives ............................................................................................................ 32  
4.1. General, specific and operational ob jectives.............................................................. 32 
4.2. Consistency of the objectives  with other EU policies................................................ 33 
 
EN 3   EN 5. Policy options and policy instruments ....................................................................... 34 
5.1. Policy options and their scope.................................................................................... 34 5.1.1. Options for objective 1 – Obtain comple te and comprehensive information on OTC 
derivatives positions................................................................................................... 34 
5.1.2. Options for objective 2 – Increa se the use of CCP clearing ...................................... 35 
5.1.3. Options for objective 3 – Improve  bilateral clearing practices.................................. 35 
5.1.4. Options for objective 4 – Increase the sta ndardisation of OTC de rivatives contracts 
and processes.............................................................................................................. 36 
5.2. Policy instruments...................................................................................................... 36  
5.2.1. The available set of policy instruments...................................................................... 36 5.2.2. The preferred policy instrument(s).............................. Error! Bookmark not defined.  
6. Analysis of impacts and choice of pr eferred options and instruments....................... 38 
6.1. Analysis of impacts.................................................................................................... 38 6.1.1. Options for operational objective 1 (information on positions)................................. 38 6.1.2. Options for operational objective 2 (use of CCPs) .................................................... 45 6.1.3. Options for operational objective 3 (bilateral clearing) ............................................. 51 6.1.4. Options for operational objective 4 (standardisation)................................................ 53 
6.2. The preferred policy options and instruments............................................................ 55 
6.2.1. The preferred policy options ...................................................................................... 55 6.2.2. The cumulative impacts of the preferred policy options............................................ 55 6.2.3. The impact on retail investors and SMEs .................................................................. 56 6.2.4. Social impact........................................................................................................... ... 56 
6.2.5. Environmental impact ................................................................................................ 56 6.2.6. Impact on third countries ........................................................................................... 56 6.2.7. The preferred policy instrument................................................................................. 57 6.2.8. The scope of legislation ............................................................................................. 60 7. The OTC derivatives market and financial market infrastructure ............................. 63 7.1. Central counterparties ................................................................................................ 63 7.1.1. Background .............................................................................................................. .. 63 
7.1.2. The political mandate................................................................................................. 66  
7.1.3. The problems............................................................................................................ .. 66 
 
EN 4   EN 7.1.4. The policy objectives ................................................................................................. 71  
7.1.5. The policy options and policy instruments ................................................................ 72 7.1.6. Analysis of impacts and choice of preferred policy option(s) ................................... 74 
7.1.7. The preferred policy instrument................................................................................. 81 7.2. Trade repositories....................................................................................................... 8 1 
7.2.1. Background .............................................................................................................. .. 81 
7.2.2. The political mandate................................................................................................. 81  
7.2.3. The problems............................................................................................................ .. 82 
7.2.4. The objectives .......................................................................................................... .. 83 
7.2.5. The policy options...................................................................................................... 83 
7.2.6. Analysis of impacts and choice of preferred policy option(s) ................................... 84 
7.2.7. The preferred policy instrument................................................................................. 86 8. Monitoring and evaluation ......................................................................................... 87 
 
 
EN 5   EN  
1. INTRODUCTION  
The financial crisis has brought over-the-coun ter (OTC) derivatives to the forefront 
of regulatory attention. The near-collapse of Bear Sterns  in March 2008, the default 
of Lehman Brothers on 15 September 2008 and the bail-out of AIG the following 
day highlighted the shortcomings in the functioning of the OTC derivatives market. 
Within that market, regulators devoted partic ular attention to the role that credit 
default swaps (CDS) play ed during the crisis.1 
Since October 2008 the Commission has been working actively to tackle the 
shortcomings that the crisis brought to light. In order to do so, the Commission 
followed a two-pronged approach: 
• in the short term it focused on the CDS market and obtained a commitment from 
the major dealers in the market to start clearing European-referenced CDS 
transactions on a central counterparty ( CCP) by the end of July 2009. This process 
lead to important results.2 
• In the medium term it focused on an in-depth  review of derivativ es markets. In the 
Communication of 4 March 2009,3 the Commission committed to deliver, on the 
basis of a report on derivatives and othe r complex structured products, appropriate 
initiatives to increase transparency and to address financial stability concerns: 
− On 3 July 2009 the Commission adopted a first Communication4 that 
examined the role played by derivatives in the financial crisis, looked at the benefits and risks of derivatives mark ets, and assessed how the identified 
risks can be reduced.
5 
− On 20 October, the Commission adopted a second Communication6 that set 
out the future policy actions the Commission intended to propose to increase transparency, reduce counterparty a nd operational risk, enhance market 
integrity and oversight in derivatives markets. It also announced that the Commission would come forward w ith legislative proposals in 2010. 
                                                
 
1  For example, the report of the High Level Group chaired by Jacques de Larosière,  published in February 
2009, highlighted the risks associated with the rapid explosion of the use of credit derivatives and stressed the need to address the lack of transparency in the market. To this end, the report recommended action to 
simplify and standardise OTC derivatives and to intr oduce CCP clearing. The report is available at 
http://ec.europa.eu/internal_market/finances/ docs/de_larosiere_report_en.pdf (see p.25). 
2  See section 3.3.2. for further details. 
3  “Driving European Recovery” - COM(2009) 114. The document is available at  
http://eur-lex.europa.eu/LexUriServ/LexUri Serv.do?uri=COM:2009:0114:FIN:EN:PDF. 
4  “Ensuring efficient, safe and sound derivatives markets” - COM(2009) 332. The document is available at 
http://eur-lex.europa.eu/LexUriServ/LexUri Serv.do?uri=COM:2009:0332:FIN:EN:PDF. 
5  The Communication is accompanied by a Staff Work ing Paper, which contai ns an overview of (i) 
derivatives markets and (ii) OTC derivative market segm ents, as well as an assessment of the effectiveness 
of current measures to reduce risks, notably as  regards CDS. The document is available at 
http://ec.europa.eu/internal_marke t/docs/derivatives/report_en.pdf. 
6  “Ensuring efficient, safe and sound derivatives markets: Future policy actions” - COM(2009) 563. 
Available at http://eur-lex.europa.eu/LexUriServ /LexUriServ.do?uri=COM:2 009:0563:FIN:EN:PDF. 
 
EN 6   EN Furthermore, in the context of the Commission's work on the food supply chain, the 
Commission published on 28 Oc tober 2009 a Communication7 that announces 
legislative proposals to improve the ove rsight and overall transparency of 
agricultural commodities derivatives markets. In particular, the Communication announces i) the extension of  appropriate transparency  and reporting requirements 
(including position reporting by categories of traders) to all agricultural commodity derivatives, including those tr aded OTC; and ii) the Commission's intention to assess 
the possibility of enabling re gulators to set position limits to counter disproportionate 
price movements or concentrations of speculative positions. 
This impact assessment report accompanies part of the proposals announced by the 
Commission,
8 namely those that look at increasing transparency and reducing 
counterparty and operational ri sk principally through the us e of post-trading market 
infrastructure (i.e. CCPs and trade reposito ries). The remaining proposals will be 
tackled in other legislative initiatives and will therefore not be examined in this 
report. 
                                                 
7  “A better functioning food supply chain in Eu rope” - COM(2009) 591. The document is available at 
http://ec.europa.eu/economy_finance/publications/publication16061_en.pdf. 
8  See Annex 2 for a full overview of  the foreseen Commission proposals. 
 
EN 7   EN  
2. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES  
2.1. Lead DG 
The Directorate-General for Internal mark et and Services (her einafter: DG MARKT) 
is the Lead DG of this process. 
2.2. Political mandate and basi s in the work programme 
At the EU level, as detailed in the introducti on of this report, a number of reports and 
Commission Communications set out the Commission's main priorities in the area of 
derivatives and already provided some insight into the more detailed actions that the 
Commission intends to undertake. 
The Council also outlined, on several occasions, its views on this particular topic. On 
19 June 2009 the European Council called “for further progress to be made in the 
regulation of financial mar kets, notably on […] the tran sparency and stability of 
derivatives markets.”  Furthermore, in the ECOFIN roadmap adopted on 20 October 
2009 as an annex to its conclusions on strengthening EU financial stability 
arrangements,9 the Council calls for “[i]ncreasing the safety  for "over the counter" 
derivatives markets, by the clearing of  standardized OTC derivative contracts 
through central counterparties and, if not, higher capita l requirements; [and] the 
reporting of non-standardized derivative contracts to trade repositories.” Finally, 
the Council outlined more detailed views on the topic in its Conclusions of 2 
December 2009.10 
The European Parliament also expressed it views on the topic of derivatives. During 
the June 2010 plenary session, the European  Parliament adopted a Resolution that 
“[w]elcomes the Commission’s initiative for better regulation of derivatives, and in 
particular OTC derivatives with a view to  reducing the impact of  the risks in the 
OTC derivatives markets for the stability of  financial markets as a whole, and backs 
the calls for legal standardisation of deri vatives contracts […], the use of trade 
repositories and centralised data storage, [and ] the use and strengthening of central 
clearing houses […]” .11 
The EU initiatives are part of the international effort to increase the stability of the 
financial system in general, and the OT C derivatives market in particular. The 
foundations for a coordinated approach on th is issue were laid down at the 2 April 
2009 G20 summit in London, where the leaders of the G20 agreed to promote the 
standardisation and resilience of credit derivatives markets,  in particular through the 
establishment of central clearing counterpa rties subject to effe ctive regulation and 
supervision.12 This commitment was confirmed and spelt out in further detail at the 
                                                 
9  http://www.consilium.europa.eu/ueDocs/cms_Data/ docs/pressdata/en/ecofin/110617.pdf. See p. 15. 
10  See Annex 3 for details. 
11  “Report on derivatives markets: future policy ac tions” (henceforth “Langen report”). The report is 
available at http://www.europarl.europa.eu/side s/getDoc.do?pubRef=-//EP//NONSGML+REPORT+A7-
2010-0187+0+DOC+PDF+V0//EN. 
12  Declaration on strengthening the financial system. The document is available at 
http://www.londonsummit.gov.uk/re sources/en/PDF/annex-strengthening-fin-sysm. See p.3. 
 
EN 8   EN 26 September 2009 summit in Pittsburgh. In pa rticular, the statement of the leaders 
of the G20 says that “[a]ll standardized OTC derivati ve contracts should be […] 
cleared through central counterparties by end-2012 at the latest. OTC derivative 
contracts should be reported  to trade repositories. […]”13 
The importance of an internationally coor dinated approach cannot be overstated. 
Given the global nature of the OTC derivativ es market, the lack of internationally 
coordinated action would only lead to regu latory arbitrage. This would severely 
curtail the effectiveness of measures to incr ease the safety of the financial system in 
any individual jurisdiction. The need of a coordinated approach has been recognised 
by the G2014 as well as by the Council15 and the European Parliament.16 
In accordance with what announced in the second Communication and following the 
political mandate given by the Council, th e preparation of a le gislative proposal on 
the derivatives market was included in  the Commission's work programme for 
2010.17 
2.3. Impact assessment and opinion of  the Impact Assessment Board 
Work on the Impact Assessment started in January 2010 with the first meeting of the 
Steering group on 9 February 2010, followe d by 3 further meetings, the last one 
taking place on 12 May 2010. The followi ng Directorates General (DGs) and 
Commission services participated in the meetings: Agriculture and Rural 
Development, Climate Action, Competiti on, Economic and Monetary Affairs, 
Energy, Industry and Entrepreneurship, Le gal Services, Secretariat General, and 
Trade. 
The report was sent to the Impact Assessment Board on 19 May 2010. The Board 
discussed the report on its hearing on 16 June 2010. Following the hearing, changes were made to the Impact Assessment in order to reflect the Board's comments. 
2.4. Consultation of interested parties 
Since October 2008 the Commission has b een engaged in almost continuous, 
extensive consultation with representatives from the great majority of stakeholders. The interaction has taken the form of bilateral and multilateral meetings, two written public consultations and a pub lic conference. Through this  process the Commission 
has obtained a wealth of information about the functioning of the derivatives market 
and its various segments, as well as views on the issues to be solved and how to solve them. An important part of this information has already been used in the preparation of the two af orementioned Communications. 
                                                
 
13  http://www.pittsburghsummit.go v/mediacenter/129639.htm. See th ird bullet of paragraph 13. 
14  See paragraph 12 of the aforementioned Pittsburgh Summit statement. 
15  See paragraph 2 of the aforementioned Council conclusions of 2 December 2009. 
16  See recital U of the Langen report. 
17  http://ec.europa.eu/atwork/p rogrammes/docs/cwp2010_en.pdf. 
 
EN 9   EN 2.4.1.  External expertise 
In line with the two-pronged approach  described in th e introduction, the 
Commission’s attention was initially focuse d solely on the CDS market. In order to 
facilitate the monitoring of the major dealers’ commitment in this area, the 
Commission created a group, the Derivative s Working Group (DWG), that included 
representatives from all the financial institutions that signed the commitment,18 from 
market infrastructures and other servic e providers that had developed / were 
developing solutions for the CDS market (CCPs, trade repositories), from other 
market participants, from relevant Eu ropean (ECB, CESR, CEBS and CEIOPS)19 
and national (AMF, BaFin and FSA)20 authorities, as well as the relevant 
Commission services. In addition to th e formal meetings of the DWG, the 
Commission held separate, ad-hoc bilatera l and multilateral meetings with a large 
number of stakeholders in the CDS market. 
The work surrounding derivatives in general ha d a less formal structure. Most of the 
information was gathered through ad-hoc b ilateral and mu ltilateral meetings with the 
various stakeholders. Only one formal group, the Member States Working Group on 
Derivatives and Market Infrastructures, was created at the end of 2009. The group is 
mainly constituted from experts representing Member States. The ECB, CEBS and 
CESR also participate in its meetings . The group's objective is to advise the 
Commission on the forthcomi ng legislative proposal. 
The Commission has also gained valuable information by actively participating in 
various international fora, in particular  the OTC Derivatives  Regulators Group and 
Basel’s Risk Management and Modelling Group. The Commission has recently also 
gained observe status on the steeri ng committee of the joint CPSS-IOSCO21 working 
group that is currently reviewing the recommendations for CCPs and preparing 
recommendations for trade repositories. In addition, th e Commission has engaged in 
frequent dialogue with non-EU authorities, in particular US authorities (the CFTC, 
the SEC,22 the Federal Reserve and the US Congress). 
2.4.2.  Stakeholder consultations 
In parallel with the pub lication of the first Comm unication, DG MARKT launched a 
first public consultation23 on 3 July 2009 (it was closed on 31 August 2009) and a 
second one24 on 14 June 2010 (it was closed on 10 July 2010). Stakeholders were 
informed about the availability of the tw o public consultations on the website of DG 
                                                 
18  The letter of commitment and the list of signatories of the letter can be found on DG MARKT’s website at 
http://ec.europa.eu/internal_market/financi al-markets/derivatives/index_en.htm#cds. 
19  Respectively the European Central Bank, the Committee of European Securities Regulators, the 
Committee of European Banking Supervisors, and Committee of European Insurance and Occupational Pensions Supervisors. 
20  Respectively the Autorité des marchés financiers, Bundesanstalt für Finanzdienstleistungsaufsicht and the 
Financial Services Authority. 
21  Respectively the Committee on Payment and Settlement Systems and the International Organisation of 
Securities Commissions. 
22  Respectively the Commodity Futures Trading Commission and the Securities and Exchange Commission. 
23  See http://ec.europa.eu/internal_market/consultations/2009/derivatives_en.htm. 
24  See http://ec.europa.eu/internal_market/consultations/2010/derivatives_en.htm. 
 
EN 10   EN MARKT through the publication of  a Commission press release25 and frequently 
asked questions26 respectively, and through electronic mail, either directly or 
indirectly (through their associations). 
The Commission services received 111 and 210 responses respec tively. Those that 
had been authorised for publication ha ve been consequently published on the 
respective consultation websites.27 The summary of responses including an 
introductory analysis of the first public  consultation is available on DG MARKT’s 
website28 and is annexed to this report (see A nnex 4). A summary of responses to the 
second public consultation is annexed to  this report (see Annex 5). The two 
consultations followed the standards as se t out in the Part III of the Impact 
Assessment Guidelines of 15 January 2009. 
All contributions have been thoroughly examined and relevant information contained 
in them has been taken into account throughout the text of this report. 
2.4.3.  Public conference 
The first consultation period was closed by a public conference organised by DG 
MARKT and held in Brussels, on 25 September 2009.29 Three panels of academics, 
industry representatives and regulators, coming from the EU and the US, presented 
their views on the need (or lack thereof) to reform the OTC derivatives market. The 
conference by and large confirmed the views obtained through the first public 
consultation. 
                                                 
25  See http://europa.eu/rapid/pressReleasesAction.do ?reference=IP/09/1083&format=HTML&aged=0&  
language=EN&guiLanguage=en . 
26  See http://europa.eu/rapid/pressReleasesActio n.do?reference=MEMO/10/256&format=HTML&aged= 
0&language=EN&guiLanguage=en. 
27  See http://circa.europa.eu/Public/irc/markt/markt_co nsultations/library?l=/financial_services/derivatives_ 
derivatives&vm=detailed&sb=Title and http://circa.eu ropa.eu/Public/irc/markt/markt_consultations/ 
library?l=/financial_services/infrastruct ures&vm=detailed&sb=Title respectively. 
28  See http://ec.europa.eu/internal_market/consultati ons/docs/2009/derivatives/summaryderivcons_en.pdf. 
29  The conference’s recordings and document s are available on DG MARKT’s website at 
http://ec.europa.eu/internal_market/financial-m arkets/derivatives/inde x_en.htm#conference. 
 
EN 11   EN  
3. PROBLEM DEFINITION  
This section looks at the three main probl ems related to the functioning of the OTC 
derivatives market that were already identified in the October 2009 Commission 
Communication. They are i) the lack of tr ansparency on positions and exposures, ii) 
insufficient mitigation of count erparty credit risk, and iii)  insufficient mitigation of 
operational risks. 
3.1. Problems related to the functioning of the OTC derivatives market 
3.1.1.  Overview of derivatives and the derivatives market30 
Derivatives are an important building block of modern fina nce. In essence they are 
financial contracts that facilitate the trading and redistribution of risks.31 They owe 
their name to the fact that their value is derived from an  underlying (e.g. the price of 
a share of a publicly traded company). Since they redistribute risk, they can be used 
either to insure (hedge)32 oneself against a particular risk or, conversely, to take on 
risk (invest or speculate).33 They can also be used to arbitrage between different 
markets. 
Derivatives can range from those that have fully standardised parameters, such as 
notional value or maturity, to those that ar e fully tailored to the specific needs of a 
particular user. The type of derivative us ually also determines how a derivative is 
traded: fully standardised derivatives ar e typically traded on organised trading 
venues, i.e. derivatives exchanges, while  customised (or bes poke) derivatives are 
traded bilaterally, i.e. of f-exchange or, as commonly ca lled, over-the-counter (OTC). 
The most common types of derivatives tr aded on an exchange are futures and 
options. Conversely, the most common types of OTC derivatives are swaps, forwards 
and (exotic) options.  
The use of derivatives has grown exponentia lly over the last decad e. Most of this 
growth was driven by OTC transactions (s ee Figure 1). At the end of December 
2009, the size of the OTC derivatives market by notional value equalled to approximately $615 trillion, a 12% increas e with respect to the end of 2008. 
However, this was still 10% lower than the peak reached in June 2008. 
                                                
 
30  A more detailed description of derivatives and their use, as well as of derivatives markets can be found in 
Annex 6. 
31  From those not willing to hold it to those who are. 
32  For example, companies use derivatives to cover the risk of a price increase in the raw materials they use 
in their production, to protect themselves from adverse currency movements and, more  in general, to better 
plan their future needs. Farmers use them to protect themselves from the ri sk of a fall in the price of their 
crops or to protect themselv es against poor harvests caused by drought or frost. 
33  Hedging and speculation are often two faces of the same coin: in most cases, little or no hedging would be 
possible without the existence of speculators. 
 
EN 12   EN Figure 1: The size of derivative s markets: on- and off-exchange34 ($ trn) 
 
Note: The figure shows the notional amounts outstanding in on- vs. off-exchange market segments in 
USD trillions in 1998-2009. On -exchange data shows outstandi ng amounts worldwide and in 
Europe(no similar geographic breakdown exists in OTC data).  
Source: BIS.  
While notional amounts provide a measure of market size and a reference from 
which contractual payments are determined in derivatives markets, they do correspond to amounts truly at risk. Gross market values
35 provide some measure of 
the financial risk from OTC derivatives. At the end of 2009, the total gross market 
value stood at $21.6 trillion, one third lower th an at the peak reached a year earlier.36 
The corresponding credit exposure37 was $3.52 trillion, about 22% lower than the 
peak reached a year earlier.38 
OTC derivatives are generally divided into  five broad segments: foreign exchange 
derivatives, interest rate de rivatives, equity derivatives , commodity derivatives and 
credit derivatives (credit defa ult swaps are the most important  type of contract in this 
segment). As can be seen in Figure 2, intere st rate derivatives are by far the largest 
segment, followed by foreign exchange  derivatives and credit derivatives.39 In April 
2007, the EU accounted for 63% of the interest  rates derivatives market and 54% of 
the foreign exchange derivatives market.40 In comparison, the US accounts for 24% 
and 15%, respectively. 
                                                 
34  Please note that, as indicated previously, the OTC market does not fully benefit from the netting effects 
provided by a CCP. This means that the size of the ma rket is somewhat inflated, since offsetting trades are 
not netted out. 
35  The sum of the replacement values of  all open contracts that are either in a current gain or loss position at 
current market prices. 
36  Since gross market value depends on market prices, the fall it registered is a direct reflection of the 
reduction in market prices from the "panic" levels of end 2008. 
37  Defined by the BIS as the gross value of contracts that have a positive market value after taking account of 
legally enforceable bilateral netting agreements. 
38  The logic explained in footnote 44 applies here as well. 
39  See Chapter 3 of the aforementioned Commission Staff Working Paper for more details, including the risk 
characteristics, on each segment. 
40  BIS(2009), Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2007 – 
Statistical Annex Tables. http://www.bis.org/publ/rpfxf07a.pdf. See p.127 and 129. 
 
EN 13   EN Figure 2: OTC derivative market segments  notional amounts outstanding (left) and 
gross market values (right); $ trillion (% of total), December 2009 
Foreign exchange
49.2 (8.0%)Interest rate
449.8 (73.2%) Unallocated
73.5 (12.0%)Credit default swaps
32.7 (5.3%)Commodity
2.9 (0.5%)Equity-linked
6.6 (1.1%)
Foreign exchange
49.2 (8.0%)Interest rate
449.8 (73.2%) Unallocated
73.5 (12.0%)Credit default swaps
32.7 (5.3%)Commodity
2.9 (0.5%)Equity-linked
6.6 (1.1%)
Interest rate
14.0 (64.9%) 
Foreign exchange
2.1 (9.6%)Unallocated
2.4 (11.3%)Credit default swaps
1.8 (8.3%)Commodity
0.5 (2.5%)Equity-linked
0.7 (3.3%)
Interest rate
14.0 (64.9%) 
Foreign exchange
2.1 (9.6%)Unallocated
2.4 (11.3%)Credit default swaps
1.8 (8.3%)Commodity
0.5 (2.5%)Equity-linked
0.7 (3.3%)
Source: BIS 
3.1.2.  The role of derivatives in the financial crisis 
Many views have been put forward as to the role played by derivatives, and in 
particular OTC derivatives, in the financial crisis. As the Commission stated in the two aforementioned Communications on deriva tives markets, derivatives were not 
the cause of the crisis. However, the Co mmission is also of the view that OTC 
derivatives, in particular certa in types of CDS, played an important role in the crisis. 
The crisis clearly demonstrated ho w the improper use of derivatives
41 can risk 
turning them into “financial weapons of mass destruction”, as Warren Buffet has 
dubbed them.42 Indeed, the crisis has shown that - in certain situations - the 
combined effect of the very characterist ics that make derivatives (in particular 
leverage) and the OTC derivatives market (high level of customisation, lack of 
transparency, high market concentration, high interconnection of large market 
participants, and lack of re gulation) so attractive can ha ve devastating consequences 
for the financial system. The example of AIG is  highly illustrative in this respect (see 
Box in section 3.1.4. for details). 
While not causing the crisis, the OTC derivati ves market contribute d to the spreading 
of the crisis beyond its point of or igin (the US sub-prime mortgages43 market) and to 
magnifying it into a full-blown global fina ncial crisis that almost brought the 
financial system, and with it the global economy, to its knees. The channel through 
which the initial shock from the sub-prim e market spread to the OTC derivatives 
market was provided by CDS contracts (in par ticular those that were used to insure 
their buyers from losses in the sub-prime market). Once the shock reached the OTC 
derivatives market it rapidl y spread throughout the system  using the complex web of 
interconnections that char acterise this market.44 The high level of concentration in 
the market did the rest.45 
                                                 
41  For example, the excessive accumulation of leverage through the use of derivatives. 
42  See Berkshire Hathaway shareholder letter for financial year 2002, p.15. Available at 
http://www.berkshirehathaway.com/letters/2002pdf.pdf. 
43  A sub-prime mortgage is a type of mortgage that is normally made out to borrowers with a lower credit 
capability, i.e. borrowers considered as having a larger-t han-average risk of defaulting on the loan. Due to 
the higher risk involved, the interest rate on subprime mortgages is higher than that of a conventional 
mortgage. 
44  Moody's has claimed that trade repl acements have proven to be a strong  indirect contagion channel in the 
crisis (no estimates of the costs were provided). Several market participants that had Lehman Brothers as a 
counterpart incurred significant losses in novating th eir trades (see section 7.1. 1. for an explanation on 
 
EN 14   EN 3.1.3.  Problem 1: Lack of transparency on OT C derivatives positions and exposures 
3.1.3.1.  Background 
By its very nature, the OTC derivatives market is opaque. This is because OTC 
derivatives are privately ne gotiated contracts and consequently any information 
concerning any one of them is usually onl y available to the contracting parties. 
In addressing the issue of availability of  information, it is important to make a 
distinction between information available to regulators, to market participants and to the general public. The law usually gives re gulators the right to request from the 
entities they regulate any kind of inform ation (including expos ures to single 
counterparties and positions in particular types of contract s) they need to carry out 
their responsibilities, while giving, at the sa me time, regulated en tities the obligation 
to provide this information. 
Information available to the public is usually much more limited (to aggregate data 
because individual information is extremel y sensitive). However, this does not mean 
that there is no publicly available information on OTC derivatives at all. There are actually a number of sources that publish ag gregate information, with different levels 
of geographical and product coverage  and different levels of detail.
46 
Market participants are somewhere in between the regulators and the public as on top 
of the publicly available information they also know their positions  with respect to 
the other market participants. 
3.1.3.2.  The issues 
While regulators can obtain detailed information about the individual positions of the 
entities they regulate, they lack a full and clear picture of the market as a whole. 
There are two aspects to this issue. First,  regulators literally do not know the exact 
size of any of the segments of the OTC de rivatives market as none of the sources 
mentioned earlier provides a comprehensive picture of the various segments of the 
OTC derivatives market. The only one that co mes close to full coverage of a market 
segment is the Warehouse Trust, which contains information on almost all outstanding CDS contracts.
47 Regulators could not gain  a full picture by piecing 
together the data from the various sour ces either, as the data published by those 
sources are not comparable.48 
                                                                                                                                                         
novation) from Lehman to other mark et participants in the days preced ing and following Lehman's default 
failure. See A. Yavorsky, "Credit Default Swaps: Market , Systemic and Individual Firm Risks in Practice", 
Moody's, October 2008. 
45  Bear Sterns is a good example of how lethal the combination of high market concentration and high level 
of interconnectedness can be. Its bail-out was deem ed necessary because US authorities feared the 
contagion that would result from its failure. In other words, Bear Sterns was deemed to be "too-
interconnected-to-fail". 
46  See http://www.isda.org/statistics/otc.htm for a (non-exhaustive) list of available sources. 
47  According to the information provided by the Warehouse Trust, the percentage of all outstanding CDS 
contracts registered in its trade repository is in the "high 90s". 
48  Even surveys with similar market coverage lead  to different results due to different samples and 
methodologies used. 
 
EN 15   EN Second, the regulators usually do not know th e detailed breakdown of the positions 
of the counterparties of the entities they regulate. Since the OTC derivatives market 
is global, a regulator would in evitably need to seek at least part of this information 
outside of its jurisdiction, usually with a third-country regulat or. The actual amount 
of information and the timeliness with which the regulator would be  able to obtain it 
would, in such case, depend on a series of factors, among which the existence of an 
enforceable information sharing agreement with the third-country regulator and the 
type of information usually collected by the latter regulator. Alternatively, the regulators might find this information in a trade repository, provided that one exists. 
However, this solution may not  be without its problems as well. Due to data privacy 
issues, for example, the trade repository ma y not be able to provi de the data to the 
regulators, or it may not maintain all the information that regulators may need(in the 
case of the one existing trade repository at the time of the crisis, the Trade 
Warehouse, the second problem  was partially present).
49 
The problem of market particip ants is almost identical to the one of regulators. As 
stated earlier, a market part icipant in principle always knows its own exposure to its 
counterparties. What it does not know, however , is what the exposure of any of its 
counterparties is to other market particip ants including, most importantly, its other 
counterparties. In other words, a market  participant knows the direct, but not the 
indirect exposure that is created when it enters into an OTC derivative contract. 
3.1.3.3.  The practical consequences 
The lack of transparency on positions has two practical implications for regulators. 
First, it does not allow regulat ors to understand how big, co mpared to the market as a 
whole, the risks building up on the balance sheets of the entities it regulates are. 
Second, it does not allow them  to gain a clear picture of  the interconnectedness of the 
positions of those entities. This can preven t regulators from a timely detection of 
risks building up both at individual institutions and in the system as a whole. It can also prevent them from accurately assess ing the consequences of a default of a 
market participant and therefore from re sponding in an appropriate manner should 
such a default occur (as it happened in Lehm an's case). In short, it prevents them 
from doing their job properly. 
The practical implications for market pa rticipants are also two. First, as the 
counterparties to an OTC derivative contract  know only the direct  exposures to one 
another, the collateral set aside to secure the exposure is by definition inadequate as 
it is calculated using incomplete informati on. Second, as the financial crisis clearly 
demonstrated, in distressed market conditi ons the lack of transparency on positions 
can generate mistrust among ma rket participants and lead to a drying up of liquidity 
in the market. 
                                                
 
49  According to information provided by the dealers, a number of contracts they  reported to the Trade 
Warehouse lacked the information on the count erparty because of confidentiality clauses. 
 
EN 16   EN 3.1.4.  Problem 2: Insufficien t mitigation of count erparty credit risk 
3.1.4.1.  Background 
Derivative contracts bind c ounterparties together for the duration of the contract. The 
duration varies depending on product type and market segment, ranging from a few 
days to several decades. Throughout the lifet ime of a contract, counterparties build 
up claims against each other, as the rights and obligations contained in the contract 
evolve as a function of its underlying. This gi ves rise to counterparty credit risk, i.e. 
the risk that a counterparty may not honour its obligations under the contract when 
they become due. 
Clearing is the function by which this risk is  managed over time. It can be carried out 
centrally (i.e. through a CCP) or bilaterally. Although both ty pes of clearing are used 
in the OTC derivatives space, bilateral clear ing is the most used form of the two. 
The provision of collateral on the basis of a bilateral collateral agreement50 is the 
most frequently used method to mitigat e counterparty credit risk in the OTC 
derivatives space. According to the re sults of the 2010 ISDA Margin Survey,51 in 
2009, almost 172000 colla teral agreements52 were in place, covering 70% of OTC 
derivatives trades. The survey further es timates that approximately $3.2 trillion of 
collateral was used in connection with OT C derivatives transactions, covering 69% 
of credit exposure.53 Finally, the survey reports that the dominant form of collateral 
was cash (82% of co llateral received and 82% of collateral delivered), with 
government securities a dist ant second (10% and 14% respectively). As can be seen 
from Figures 3a and 3b, all the above items  have recorded si gnificant growth over 
the last few years. 
                                                 
50  A bilateral collateral agreement is an agreement that defines the terms or rules under which collateral is 
posted or transferred between counterparties to an  OTC derivative contract. These terms can include 
thresholds, minimum transfer amounts, eligible types of collateral, haircuts applicable to eligible non-cash 
collateral and rules for the settlement of disputes arising over valuation of derivative positions. For more 
details on the structure of collateral agreements see,  for example, OTC Derivatives: Settlement Procedures 
and Counterparty Risk Management, BIS, September 1998. 
51  Available at http://www.isda.org/c_and_a/pdf/ISDA-Margin-Survey-2010.pdf. 
52  The majority of them (92%) were ISDA credit support agreements, known as Credit Support Annexes 
(CSAs). Non-ISDA documents include, among others, bespoke margin agreements and jurisdiction-
specific agreements such as French AFB and German Rahmenvertrag. 
53  As stated in the Commission Staff Working Paper, the Commission could not judge the solidity of the data 
provided in the survey, as no information was available about the methodology that had been used for 
calculating the numbers. A recent ECB study ("Cred it Default Swaps and Coun terparty Risk", August 
2009; see p. 48-50) lists several reasons why the actua l level of collateralisation of exposures is probably 
lower than what reported in the 2009 survey and estimates the level of collateralisation in the CDS market 
at 44%. 
 
EN 17   EN Figure 3a: Number of outstanding bilateral co llateral agreements (left) and amount of 
collateral used in connection with bilaterally  cleared OTC derivati ves transactions (in 
$ trillion) (right) 
 
Source:ISDA 
 
Figure 3b: Percentage of OT C derivatives trades covere d by a bilateral collateral 
agreement (left) and percentage of cred it exposure covered by collateral (right) 
 
 
 
Note: The 2010 ISDA Margin Survey does not provide a breakdow n per asset class of the percentage 
of credit exposure covered by collateral. Furthermor e, due to changes in the methodology, the overall 
number for 2009 is not directly comparable with the one reported for 2008. 
Source: ISDA 
3.1.4.2.  The issues 
Overall, collateral is only an effective insurance against credit exposure if (i) 
exposure is calculated frequently and accurate ly; (ii) it is effectively exchanged in a 
timely manner; (iii) it offers a comprehe nsive coverage against overall potential 
counterparty credit exposure; and iv) it is legally enforceable in the event of the 
counterparty's default. Bilateral clearing is  associated with a number of potential 
weaknesses in at least three of these aspects. 
First, while daily valuation and (close-to-da ily) exchange of collateral is the norm for 
the major dealers, the frequency falls subs tantially as one moves down to second and 

 
EN 18   EN third tier institutions. Weekly and even mont hly valuation and exchange of collateral 
continues to be an ex isting market practice.54 
Second, bilateral clearing fundamentally re lies on each party's own assessments of 
the current value of and the risk associated  with a particular OTC derivative or a 
portfolio of such derivatives. The assessm ent depends on the qua lity of the risk 
model used (the crisis has re vealed that risk models used  by banks were less robust 
than previously thought), on the information th at is fed into the model (which, as it is 
argued in the previous section, is incomple te) and on competing considerations, such 
as the quest to maximise commercial opportunities and associated profits. 
Last, but certainly not least, the majority of bilateral collateral arrangements provide 
only for the exchange of variation margin (c overing fluctuations in the value of the 
contract), but not of initial margin (cove ring the potential cost of replacing the 
contract in case the original counterparty defaults).55 Furthermore, the level of 
collateral required often depends on the credit quality of  the counterparty.56 
Typically, for an equivalent level of expos ure, a counterparty with a high credit 
rating will be asked to post less collateral th an one with a lower credit rating. In cases 
where one of the two counterparties is a non-financial institution or a government-
related institution (e.g. the debt management  office), the norm appears to be not to 
ask the latter to post any collateral. Figure 4 below provides an overview of the 
counterparties of collateralis ed transactions by type of  respondent to the 2010 ISDA 
Margin Survey. 
Figure 4: Counterparties in collater alised transactions (% of total) 
Large dealers Medium-sized firms Small firms 
 
 
                                                 
54  According to the 2010 ISDA Margin Survey, only 29% of the respondents to the Survey reconcile their 
trades daily, whereas 47% of the trad es are still reconciled on an ad-hoc basis or in response to disputes. 
The results are better for large dealers, who perform daily reconciliation on 56% of their trades. 
55  As stated earlier, the posting of initial margin is required in the prime brokerage business. This is 
presumably due to the fact that a prime broker ha s a similar role to a CCP. Much like a CCP, a prime 
broker concentrates risk and responsibilities for risk management. Indeed, when a prime broker 
intermediates a trade between a hedge fund and a dealer, it becomes a counterparty to two trades, one with 
the hedge fund and one with the dealer. The lack of posting of initial margin in a peer relationship (e.g. 
between two dealers) is due to the fact both parties would have to post the same amounts (as both are 
exposed to replacement risk) which would effectively net themselves out.  
56  According to the 2010 ISDA Margin  Survey, 86% of all respondents said that sometimes they set collateral 
thresholds based on credit ratings, while only 12% said that they use CDS spreads. The corresponding 
shares for large dealers are 100% and 27% respectively. 
 
EN 19   EN Note: The category 'Other' includes transactions with CCPs, energy and commodity trading firms, 
sovereigns and supranationals, and other counterparties. In general, each of these categories of 
counterparties represents at most 1% of the total transactions.  
Source: ISDA 
Concerning the legal enforceability of bila teral collateral arra ngements in the EU, 
this aspect is covered by the Financial Collateral Arrangements Directive.57 
3.1.4.3.  The consequences 
There are several consequences arising from the issues listed above. First, and most 
important, the amount of collateral is, on average, too low compared to the level of counterparty credit risk a ssociated with OTC derivativ es exposures. Based on the 
ISDA survey, approximately $1.4 trillion of exposures in OTC derivatives remain 
uncollateralised. In other word s, the amount of leverage in  the market is higher than 
should be the case given the amounts of collateral. 
Second, infrequent valuation of exposures and exchange of colla teral may lead to 
large margin calls in case of abrupt price movements between calculation dates, which may in turn result in high costs fo r the party receiving the margin call (as it 
may not have the liquidity to meet the cal l and may need to borrow it) or may even 
lead to its default (if it cannot obtain the n ecessary resources to meet the call). The 
same reasoning can be applied to situations where the amount of collateral that needs 
to be posted depends on th e credit quality of the counterparty. AIG's example 
provides a clear illu stration of that. 
Third, the differences in the risk models used leads to situations where disputes may 
and frequently do arise
58 between counterparties as regards the mark-to-market value 
associated with a particular contract and the corresponding co llateral obligation it 
gives rise to.59 This leads to unwelcome delays to the collateralisation process. 
3.1.5.  Problem 3: Insufficient miti gation of operational risk 
3.1.5.1.  Background 
An OTC derivatives trade goes through severa l processing steps from the point at 
which two parties agree to a trade to th e point where the transaction has been 
confirmed (see Figure 5). 
                                                 
57  2002/47/EC. 
58  No statistics on the frequency of collateral disputes  could be found. However, the fact that collateral 
disputes are frequent was confirmed by a number of market participants. 
59  In other words, a collateral dispute is most likely to arise due to a dispute over the valuation of an OTC 
derivative. This may, for example, be the result of different valuation models used by the two 
counterparties to the OTC derivative contract. Collateral disputes due to differing views on the value of the 
collateral asset pledged are far less common. 
 
EN 20   EN Figure 5: An OTC derivatives transa ction from trade to confirmation 
 
Source: BIS. 
The story does not end with the confirmati on of a transaction. During the lifetime of 
an OTC derivative contract several one-o ff (e.g. the termination of a contract) or 
recurring events (e.g. collateral manageme nt and settlement of cash payments), 
stemming from the rights and ob ligations of the contract, need to be managed (see 
Figure 6). 
Figure 6: Lifecycle elements of an OTC derivatives transaction 
 
Source: BIS. 
The processes that have been developed to  manage these events tend to be quite 
complex and in many cases they are highl y interconnected, i.e.  the output of one 
process is used as an input for another.60 Ideally, in order to avoid that delays in one 
process have a knock-on eff ect on other processes, a hi gh level of au tomation would 
be desirable. This does not apply only to  the internal processes of individual 
counterparties; it is equa lly valid for the interac tion between counterparties.61 
                                                 
60  For example, the collateral management process tells a party to a contract the amount of collateral that 
needs to be posted to its counterparty at a particular po int in time. This information is then used as an input 
into the process used to settle the cash payment involved. 
61  The overall speed of the bilateral processes will be de termined by the slower of the two counterparties to a 
contractual relation. 
 
EN 21   EN The level of automation is, in general, directly proportional to the level of 
standardisation of a contra ct: the higher the level of standardisation, the more 
automated processes can be used, and vice versa.62  The same logic applies to the 
adoption of centralised infrastructure, such as CCPs and trade repositories: their adoption requires relatively high  levels of standardisation (especially in the case of 
CCPs). 
The responses to the first public consultation highlighted  that one can distinguish 
between three different types of standardisation, namely: 
(a) contract standardisation (standard legal relationships, confirmation 
agreements, documentation, market conventions on event handling); 
(b) product standardisation (standard valuations, payment structures, 
dates); and 
(c) process standardisation (straight-t hrough processing (STP), matching, 
confirmation and settlement). 
As clearly stated in its October 2009 Communication the Commission decided to 
focus its attention on the first and third t ype of standardisation, i.e. contract and 
process standardisation. The main reason behind  this focus lies in the fact that high 
levels of contract and process standardisation are compatible both with the ability of 
market participants to hedge specific risk s and the possibility to adopt centralised 
solutions (trade repositories and CCP s). Conversely, high levels of product 
standardisation, while compatible with the adoption of centralised  solutions, are not 
necessarily compatible with the hedging requirements of market participants.
63 
3.1.5.2.  The issues 
The OTC derivatives market allows for a high degree of flexibility in defining the 
economic and legal terms of derivatives contracts. As a consequence, there are a number of highly bespoke and complex cont racts in the market that still require 
significant manual intervention in many stages of the processing. Manual 
intervention becomes particularly problematic  once the transaction volumes of a type 
of contract start to increase rapidly. I ndeed, in the past, th e rapid expansion of 
volumes in the OTC derivativ es market has invariably led to significant processing 
backlogs of unconfirmed trades, as the de velopment of post-trading processes was 
not rapid enough to cope with the rising volumes and increasing complexity of 
derivatives trades. In spite of the progress made to reduce these backlogs in the past 
few years, especially in th e area of credit derivatives, the problem has temporarily 
resurfaced during the crisis. This demonstrated that more needs to be done to foster standardisation. 
                                                
 
62  Standardisation is a sufficient, but not a necessary condition for automation. Indeed, even the processing of 
non-standard contracts can be automated to a certain extent. 
63  This does not mean that product uniformity will not increase. The CDS market is a clear example of a 
market where all three types of standardisation took pl ace in response to the drive to adopt CCP clearing. 
 
EN 22   EN An additional issue that concerns standardis ation (or lack thereof) is its impact on 
liquidity. In general, the mo re bespoke the product, the less liquid it is (and hence the 
more difficult it is to sell or  replace it, even more so in distressed market conditions). 
3.1.5.3.  The consequences 
Low levels of standardisation of contract s and low automation of processes increases 
operational risk, i.e. the risk  of loss resulting from inadequate or failed internal 
processes, people and systems.64 This may in turn lead to increased legal risk, may 
limit transparency and may even lead to an  increase of counterparty credit risk. For 
example, the failure to confirm a transa ction because of lack of automation may 
jeopardise its enforceability or the ability to net it against other transactions. Furthermore, to the extent that it allows errors in recording transactions to go 
undetected, an unconfirmed transaction may cause market or counterparty credit 
risks to be incorrectly m easured and, most seriously, to be underestimated. As 
indicated earlier, low levels of standard isation also limit the level of adoption of 
centralised market solutions (i .e. trade repositories and CCPs). 
3.1.6.  The problem tree 
Figure 7 below provides an overview of the various problems, their drivers and their 
consequences. 
Figure 7: The problem tree 
 
                                                 
64  The full definition by the Basel Committee on Banking Supervision is "the risk of loss resulting from 
inadequate or failed internal processes, pe ople and systems or from external events". 
 
EN 23   EN 3.1.7.  The combined effect of problems 1, 2 and 365 
Each problem described in this section can have negative consequences for the 
proper functioning of the financial system. Howe ver, it is their combined effect that 
can lead to truly devastating results. The case of AIG is extremely telling in this 
sense. 
Box 1: American Inte rnational Group (AIG) 
Derivatives are tools that allow for the trad ing and redistribution of  risk. Due to this 
characteristic, derivatives have often been ha iled as a tool that leads to a better (i.e. 
more even) distribution of risk thr oughout the economy. The financial crisis 
demonstrated that the opposite can also be true: derivatives can lead to an excessive 
concentration of risk in the hands of a ha ndful of market players. One such player 
was AIG, a US insurance company.  
Through one of its subsidiari es (AIG Financial Products),66 AIG managed to 
accumulate a large exposure67 to the US sub-prime mortgages market by selling 
highly customised CDS, mainly to big fi nancial institutions. In essence AIG sold 
these banks insurance agains t losses on these securities. Since AIG had the highest 
possible credit rating (AAA), it managed to negotiate favourable collateralisation 
terms (basically, as long as it maintained  its AAA rating, it di d not have to put up 
any collateral to back the CDS trades).68 Collateral makes a transaction more 
expensive, so by not having to post it AIG wa s able to enter into a higher number of 
contracts than would have been possibl e if collateralisation were required.69 
AIG's accumulation of large positions was f acilitated by the lack of transparency, 
both towards the market and towards regulators.70 Due to the bilateral nature of the 
contracts none of AIG’s counterparties kne w its overall exposure to the sub-prime 
                                                 
65  Problem 3 played a less prominent role compared to the other two. The lack of standardisation was mainly 
involved in the context of the lack of transparency on AIG's position. Indeed, the CDS sold by AIG were 
not registered in the trade repository as they were too bespoke. 
66  The company had a UK banking license. There was al so another AIG entity with a French banking license, 
Banque AIG, which made similar deals to the ones of AIGFP, but on a smaller scale. 
67  As Fitch Ratings reported in the fifth annual update of its Global Credit Derivatives Survey (published in 
2007), AIG was ranked "only" as the 20th largest counterpart by notional amount, with a gross sold position of $482 billion. However, the problem was that unlike dealers, who tend to run a balanced book, 
AIG was a net seller of protection, with its net sold position being only slightly lower than the gross one 
($384 billion). 
68  This arrangement exacerbated the pro- cyclicality of the collateral agreement. 
69  Since capital and collateral are complementary types of protection against losses (the former is supposed to 
cover "foreseeable" losses, while the latter is supposed to cover "unexpected" or "residual" losses), this situation may give rise to questions regarding the proper capitalisation of AIGFP's business. However, 
such analysis is outside of the scope of this report. 
70  The CDS were so highly customised that they were not captured by the trade repository run by the DTCC. 
71  On 15 September 2008, all three main credit rati ng agencies (Standard and Poor's, Fitch Ratings and 
Moody's) all downgraded AIG's long-term debt rating. 
72  According to a disclosure made by AIG on 15 March 2009, banks recei ved a little more than $45 billion in 
payments related to CDS contracts underwritte n by AIG. . The documents are available at 
http://www.aig.com/aigwe b/internet/en/files/Co unterparties150309RELonl y_tcm385-155648.pdf and 
http://www.aig.com/aigweb/internet/en/files/Co unterpartyAttachments031809_tcm385-155645.pdf. 
73  Overall, the value of the package put together by the US government to rescue AIG amounted to $182.5 
billion. http://www.gao.gov/new. items/d09490t.pdf. See p.4. 
 
EN 24   EN mortgage market and therefore could not pr ice the risk of the contracts correctly. 
The lack of transparency coupled with a deficient cr oss-border regime for the 
supervision of complex and large financia l institutions prevented regulators from 
detecting the build-up of th e risk on AIG’s balance sh eet (and consequently on the 
balance sheets of its counter parties) and hence of the po ssibility of preventing the 
situation that led to  AIG’s unravelling. 
The severe deterioration of the sub-prim e mortgage market led to losses in 
securities that were backed by pools of sub-prime mortgages. As AIG was the one 
that “insured” those losses, it was ca lled to compensate the buyers of the 
“insurance”. This caused losses at AIG and prompted credit rating agencies to 
downgrade the company.71 The downgrade proved to be the proverbial straw that 
broke AIG’s back. It triggere d the special clause in AIG's collateral agreement that 
specified that collateral w ould be asked if the compa ny would be downgraded. This 
prompted what turned out to be a massive call for collateral that AIG was not able 
to meet and was therefore pushed to the brink of bankruptcy. The fact that AIG’s 
bankruptcy would probably have led to significant  losses at big banks,72 prompted 
the US government to intervene and rescue AIG.73  
3.2. Economic magnitude of the problem 
While, as explained in the introduction, OT C derivatives did not  cause the crisis, 
they played a part in its unfolding. Their ex act contribution to the costs of the crisis 
would be difficult to estimate as this w ould require the knowledge about the share of 
damage to the financial system that could be  directly attributed to OTC derivatives.  
Annex 8 attempts to provide a very rough estimate of these costs. By first attempting to estimate the overall costs of the crisis (w hich are defined as the sum of the direct 
costs of intervention in the banking sector and the costs in  terms of lost output) the 
analysis concludes that the share of OTC deri vatives in total costs is at least several 
billions of euro. 
3.3. How would the problems evolve without EU action? 
There are currently several non-legislat ive initiatives, both at European and 
international level, that aim at resolv ing the problems described in section 3.1. A 
number of these initiatives have been laun ched due to the financial crisis; some of 
them pre-date it. The most overarching of these initiatives is the one involving the 
Operations Steering Committee (OSC),
74 a consortium that includes 14 major dealers 
(the so-called G14)75 in the OTC derivatives market, a number of buy-side 
institutions and industry a ssociations. The OSC has committed, through a series of 
letters to regulators, to deliver structural  improvements to the global OTC derivatives 
market.76 The latest of these letters, da ting from 1 March 2010, reaffirms and 
strengthens existing commitments and deadli nes and introduces some new ones. The 
commitments cover five main areas: i) de veloping and using trade repositories in 
                                                 
74  Previously known as the Operations Management Group (OMG). 
75  Bank of America-Merrill Lynch, Barclays Capital,  BNP Paribas, Citi, Credit Suisse, Deutsche Bank, 
Goldman Sachs & Co., HSBC Group, J.P. Morgan, Morgan Stanley, The Royal Bank of Scotland Group, Société Générale, UBS and Wachovia Bank. 
76  The letters containing the detailed commitments can be found at  
http://www.newyorkfed.org/news events/otc_derivative.html. 
 
EN 25   EN order to increase transparency; ii) increasing the use of CCPs; iii) increasing the level 
of product, processing and legal standardis ation in each asset class with a goal of 
securing operational efficiency and mitigati ng operational risk; iv) enhance bilateral 
collateralisation arrangements to ensure r obust risk management; and v) improving 
operational performance, e.g. via straight-through-processing (STP).77 
The various commitments of the OSC, toge ther with other in itiatives running in 
parallel, are described in more detail in the next three subsections. The combined 
outcomes of these various initiatives can se rve as a baseline scenario against which 
any future EU action can be compared. 
In terms of legislative initiatives specifically targeting OTC derivatives, the 
Commission services are not aware of any su ch initiatives currently conducted at the 
level of individual Member States. There are,  however, legislative initiatives taking 
place in jurisdictions other than the EU, mo st notably in the United States. These are 
described a bit more in detail in section 3.3.4. 
3.3.1.  Current initiatives in the area of problem 1 
The existing initiatives aimed at increasi ng the transparency on positions in OTC 
derivatives have focused primarily on the use of trade repositories. 
The only trade repository that existed at the moment when the financial crisis started, 
i.e. the Trade Inform ation Warehouse (TIW),78 proved to be a very useful tool for 
increasing transparency.79 Indeed, after Lehman's defau lt it contributed to reduce the 
uncertainty in the CDS market regarding th e net exposure of market participants due 
to CDS written on Lehman, albeit with a delay.80 In its June 2009 letter, the OSC 
members committed to reporting all their CD S trades to the TIW by mid-July 2009, a 
task that, according to the Group, has been  completed. Given the high concentration 
of the market, this means that the TIW now covers almost all outstanding CDS 
contracts.81 
Following the positive experience with CDS, the OSC committed itself to creating at 
least two additional trade repositories, one for interest rate derivatives and one for equity derivatives, and to reporting all their trades to them. TriOptima was selected as the provider of the former, while DT CC/Markitserv was chosen to run the latter.
82  
                                                 
77  The automated end-to-end processing of trades including, where relevant, the automated completion of 
confirmation, matching, generation, and clearing and settlement of orders. STP enables the entire trade 
process to be conducted electronically, without the need for rekeying or reformatting data. 
78  The trade repository was late r renamed into Warehouse Trust. 
79  Interestingly, the TIW was initially created with a di fferent objective in mind. That is, to aid the credit 
derivatives industry in reducing the confirmation backlogs plaguing the CDS market. 
80  Before the TIW divulged the information the market new only about the gross exposure, which amounted 
to $400 billion. It turned out that the net exposure, and hence the amount of money that actually changed 
hands was a far more manageable $5.2 billion. However, the information on the costs that Lehman's 
counterparties had to incur in order to replace the contracts they entered into with Lehman was never made 
public.  
81  No official estimate is available. However the co nsensus appears to be that the percentage of market 
coverage is in the "high 90s". 
82  The selection of the two providers was announced on 16 September and 22 October 2009, respectively. 
 
EN 26   EN TriOptima launched its Interest Rate Trade Reporting Reposito ry on 20 January 
2010,83 while DTCC/Markitserv launched its  Equity Derivatives Reporting 
Repository at the beginning of August 2010.84 In addition to the OSC commitment, 
CLS Bank has announced that it is studyi ng the possibility of creating a trade 
repository for foreign exchange derivatives.85 There is currently no information on 
whether a trade repository for commod ity derivatives will be created. 
On the public sector side, the OTC De rivatives Regulators' Forum, a group 
comprised of international financial regulators,86 was created in September 2009 to, 
among other things, coordinate and articula te information needs of the regulatory 
community. This includes considering and developing common reporting templates 
and formats, articulating specific expectati ons, and considering mechanisms for data 
reporting.  
These initiatives should result  in a significantly improvement  in the transparency of 
the OTC derivatives market, as informa tion on large portions of the outstanding 
contracts would be stored in  a trade repository. The exact market coverage that will 
be achieved through these initiatives depends on the combined market share of the OSC members, which varies from one ma rket segment to another (see Figure 12). 
3.3.2.  Current initiatives in the area of problem 2 
In terms of reducing counterparty credit risk, existing industry initiatives aim both at 
increasing the use of CCP clearing and at  improving bilateral clearing processes. 
3.3.2.1.  CCP clearing 
On CCP clearing, significant progress has been  achieved in terms of establishing and 
using new CCPs that clear OTC derivatives . The CDS market is a case in point. 
Since the beginning of the crisis , regulatory pressure to introduce CCP clearing in the 
market has resulted in the establishment of several CCPs. Three of those CCPs are 
located in Europe (Eurex Clearing, ICE Cl ear Europe and LCH.Clearnet SA) and are 
the result of the Commission-led process de scribed in the introduc tion of this report. 
While all three are actively cl earing contracts, mo st of the volumes are concentrated 
in one of them (ICE Clear Europe).
87 Figure 8 below shows the volumes that it has 
cleared since its launch and value of  the open contracts it manages. 
Figure 8: Evolution of cleared volumes and open position for European-referenced 
index (left) and single-name CDS (right) at ICE Clear Europe (€ billion) 
                                                 
83  At the end of July 2010, positions with a gros s notional value of $465 trillion were registered in 
TriOptima’s trade repository. Correcting for the double- counting of CCP-cleared cont racts, this means that 
approximately 70-75% of all contracts ar e registered in the trade repository. 
84  See http://www.dtcc.com/news/press/re leases/2010/dtcc_launches_equity.php. 
85  See http://www.cls-group.com/Med ia/Pages/NewsArtic le.aspx?id=46. 
86  See http://www.newyorkfed.org/newsevents/news/ma rkets/2009/Appendix_1.pdf for a list of the members 
of the Forum. See also http://www.otcdrf.org/index.htm. 
87  As of end of April, Eurex had an open interest of €95 million, while LCH.Clearnet SA had an open interest 
of a little over €177 million. 
 
EN 27   EN  
Source: ICE Clear Europe  
Furthermore, the crisis has prompted market  participants to reassess the advantages 
of using existing CCPs. For example, SwapCl ear, the main CCP clearing interest rate 
swaps, has registered an important increase in  its business since the start of the crisis 
(see Figure 9 below).88 
Figure 9: Evolution of cleared volumes ('000 trade sides) and open position ($ 
trillion) for interest rate  derivatives in SwapClear 
050100150200250
JF M A M JJA S O N D J FMAMJ J ASOND J FMAM J J ASONDJ FMAMJ J A
Volumes Outstanding notional2007 2008 2009 2010
050100150200250
JF M A M JJA S O N D J FMAMJ J ASOND J FMAM J J ASONDJ FMAMJ J A
Volumes Outstanding notional2007 2008 2009 2010
 
Source: SwapClear 
The take up of CCP clearing has certain ly benefitted from the commitments put 
forward by the major dealers (i.e. members of the G14). The latter have set ambitious targets both in terms of propor tion of eligible contracts that  would need to be cleared 
and deadlines by which this would need to happen. For example, for CDS, they have 
(collectively) committed to clear 85% of both new and historical eligible trades by 
                                                
 
88  According to TriOptima, about 47% of all the contracts registered in its  trade repository are cleared by a 
CCP. 

 
EN 28   EN the end of June 2010.89 They have also committed to broaden the set of trades 
eligible for central clearing. 
3.3.2.2.  Bilateral clearing 
The industry has also made several comm itments with respec t to the bilateral 
collateral management process. In particul ar, the industry has committed to develop a 
detailed roadmap containing specific implementation steps and timeframes for 
improving collateral management. Th e roadmap was published in 200990 and 
updated in 2010.91 One of the items of the roadmap concerned the development of 
best practices for collateral manageme nt. These were published by ISDA in a 
document at the end of June 2010.92 
Another set of commitments contained in the roadmap concerns portfolio 
reconciliation and the ways to improve th is practice. Market participants use 
portfolio reconciliation to facilitate th e bilateral collateral  management process.93 
According to the latest ISDA Margin Surve y, most of the respondents to the survey 
(90% compared to 80% in the previous y ear) use reconciliation services. However, it 
is mainly large dealers that tend to reconcile a high percentage of their trades on a daily basis (usually inter-dea ler trades). Furthermore, a large proportion of trades 
(44%) is still reconciled on a quarterly basis at  best (sometimes even only in case of 
disputes). The OSC has in essence committed to extending portfolio reconciliation as best practice throughout the OTC market.
94 
Although portfolio reconci liation ensures that count erparties agree on the 
composition of their collateralised portfolio s, they may still disagree about the value 
of reconciled portfolios, pa rticularly those c ontaining complex OTC derivatives. This 
is why another group of commitments made by the OSC concerns collateral disputes. 
In particular, the OSC has committed to developing a mechanism to resolve collateral disputes by the end of September 2009. The commitment was fulfilled.
95 
3.3.3.  Current initiatives in the area of problem 3 
The industry has undertaken considerable wo rk to increase the standardisation and 
increase the operational efficiency in the OTC derivatives market. Some of this is 
                                                 
89  For details on the commitments for both credit and interest rate derivatives see 1 March 2010 letter. 
Available at http://www.newyorkfed.org/newsevents/news/markets/2010/100301_letter.pdf. 
90  Available at http://www.isda.org/c_and_a/pdf/ISDACollateralMgmtRoadmap.pdf. 
91  Available at http://www.isda.org/c_and_a/pdf /2010-ISDA-Roadmap-Collat eral-Management.pdf. 
92  Available at http://www.isda.org/c_and_a/pdf/ISDA-Best-Pr actices-for-the-OTC-Derivatives-Collateral-
Process.pdf . 
93  In essence, portfolio reconciliation is the process of  arriving at a point where certain pre-identified items 
match between the books and records of  two parties with respect to a portfolio of trades between them. Its 
importance for the collateral management process lies in the fact that without agreeing the population of trades and their characteristics, count erparties cannot go on to discuss differences in the mark-to-market 
values and the subsequent collateral obligation. Portfo lio reconciliation can be done either through bilateral 
arrangements or through the use of third-party vendors that provide a centralised service (e.g. TriOptima). 
94  See ISDA (2010), Feasibility Study Implementation Plan: Extending Collateralized Portfolio 
Reconciliations. Document available at http://www .isda.org/c_and_a/pdf/IS DA-Port-Rec-Feasibility-
Study-Implementation-Plan.pdf. 
95  See ISDA 2009 Dispute Resolution Procedure. Av ailable at http://www.isda.org/c_and_a/pdf/ISDA-2009-
Dispute-Resolution-Procedure.pdf. 
 
EN 29   EN related to the OSC commitments. These in clude targets on electronic affirmation and 
confirmation (in view of reducing furthe r the backlog of unconfirmed trades), 
automation of processes and portfolio compression.96 The latter has seen a 
substantial increase in its use since the onset of the crisis , especially in the CDS and 
interest rate swaps markets (see Figure 10 below). 
Figure 10: Volumes of portfolio compression in CDS and interest rate swaps ($ 
trillion) 
051015202530354045
2005 2006 2007 2008 2009 2010
Interest rate swaps
 CDS
051015202530354045
2005 2006 2007 2008 2009 2010
Interest rate swaps
 CDS  
Note: Data for 2010 refers to the situation at the end of August. 
Source: TriOptima 
Some of the work was driven by the regulatory push for in creased use of CCP 
clearing, for example the launch of th e "Big" and "Small Bang" Protocols97 for the 
credit derivatives, and th e standardisation of cou pons of single-name CDS. 
3.3.4.  Legislative initiatives outside the EU 
The OTC derivatives market is, by its very nature, a global market. As indicated in 
section 2, the G20 set out the basic objectives  for action on this market and is now 
coordinating the global effort that is aimed at turning these objectives into concrete 
actions. Several initiatives are already under way. Apart fro m the initiatives in the 
EU and the US, which represent the biggest share of the market, several initiatives 
are underway also in Asia (Hong Kong, Japan,98 Singapore and South Korea). The 
Commission’s policy proposals need therefore to be considered in this context. 
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Act”), the 
US legislation on financial regulatory reform  which also contains measures targeting 
the OTC derivatives market, was singed into law by President Obama on 21 July 
                                                 
96  In OTC derivatives, participants build up gross positions that far exceed their net risk position as many of 
the contracts offset one another. Portfolio compression (also known as  "tear-ups") is a process that 
identifies these offsetting trades and eliminates them , leaving the market risk  profile of the market 
participants unchanged. 
97  The protocols can be found at http://www.isda.org/companies/auctionhardwiring/auctionhardwiring.html 
and http://www.isda.org/smallbang/ respectively. 
98  Recently, Japan's parliament approve d legislation that requires some OT C derivatives trades to be cleared 
by a CCP. See http://www.reuters.c om/article/idUSTOE64B07O20100512. 
 
EN 30   EN 2010.99 The Act broadly covers al l types of OTC derivatives100 (it splits them into 
two categories: swaps and security-based swaps)101 and all types of market 
participants.102 Most of the obligations set in the Act fall on four categories of market 
participants: swap dealers, security-based swap dealers, major swap participants and 
major security-based swap participants  (“dealers and major participants”).103 The 
areas covered by the Dodd-Frank Act and the objectives it pursues are the same as 
the ones covered by the Commission proposal. Among other things, it: 
• requires that details on all OTC derivative contracts be reported to a registered 
trade repository or, in case a contract can  not be reported to a repository, to the 
relevant authority; 
• requires that all eligible OTC derivative contracts be cleared through a CCP (the 
Act foresees exemptions104 to this requirement); 
• introduces minimal capital, as well as initial and variation margin requirements 
for dealers and major participants on a ll OTC derivative contracts that are not 
cleared by a CCP; 
• updates the regulatory fra mework for CCPs; and 
• sets up a regulatory framew ork for trade repositories. 
In many instances the Act sets out the ma in principles that should apply to OTC 
derivatives and to market participant activ e in the OTC derivatives market, leaving 
the definition of a number of detailed tec hnical standards to the relevant supervisory 
authorities (CFTC, SEC or banking authorities). 
3.4. Treaty base and subsidiarity 
3.4.1.  Treaty base, competence 
The competence of the EU derive s from Article 114 of the TFEU105 (ex Article 95 - 
harmonisation). A second base that could be used is Article 53 of the TFEU (ex Article 47(2) – professional services). The final selection of the Treaty base will be determined depending on the content of the draft proposal. 
                                                
 
99  Available at http://frwebgate.access.gpo.gov/ cgi-bin/getdoc.cgi?dbname= 111_cong_bills&d ocid=f:h4173  
enr.txt.pdf. 
100  OTC derivative contracts where one of the counterparties is the government, one of its agencies or the 
Federal Reserve Bank, are excluded from the scope of the Act. In addition, there is a possibility for the 
Secretary of the Treasury to exempt  foreign-exchange derivatives from the clearing requirement (but not 
the reporting requirement). 
101  The former fall under the remit of the CFTC, the latter under the remit of the SEC. 
102  The Act leaves open the possibility to exclude small banks, credit unions and savings associations from the 
definition of financial entity (see footnote 105) and hence from the clearing requirement. 
103  In principle, non-financial institutions could be captur ed by one of these categories. This is most likely to 
occur to non-financial institutions with large positions in OTC derivatives. 
104  If one of the counterparties to an OTC derivative contract is not a financial entity (this includes, among 
others dealers and major participants), uses the contract to hedge or mitigate commercial risk, and notifies the competent authority on how it generally meets its financial obligations associated with entering into the 
non-CCP cleared contract, then the contract is not subject to the clearing requirement. 
105  Treaty on the Functioning  of the European Union. 
 
EN 31   EN 3.4.2.  Subsidiarity 
According to the principle of  subsidiarity (Article 5.3 of the TFEU), action on EU 
level should be taken only when the aims envisaged cannot be achieved sufficiently 
by Member States alone and can therefore, by reason of the scale or effects of the 
proposed action, be better achieved by the EU. The preceding an alysis has shown 
that –  
• although all the problems defined above have important implications for each 
individual Member State, their overall impact can only be fu lly perceived in a 
cross-border context. This is because th e OTC derivatives market is, by its very 
nature, a cross-border market. Conseque ntly, the effectiveness of remedies 
implemented in an autonomous and uncoordinated way by individual Member 
States would likely be very low as such remedies would be able to capture just a 
portion of the market. Furthermore, given the systemic impact of some of the 
problems, uncoordinated action may even prove counterproductive; 
• certain aspects of the identified proble ms are partly covered by the existing acquis 
communautaire , notably the Financial Collateral Arrangements Directive, the 
Settlement Finality Directive, the Market in Financial Instruments Directive, the 
Capital Requirements Directive and th e UCITS Directives. Any new proposal 
would need to tie in perfectly with thes e pre-existing EU measures. This can be 
best achieved in a common effort. 
Against this background EU action appears ap propriate in terms of the principle of 
subsidiarity. 
 
EN 32   EN  
4. THE OBJECTIVES  
4.1. General, specific and operational objectives 
Taking into account the overall effect of  the identified problems (see section 3.1.6. 
above), the general policy objective of this ex ercise is to reduce the systemic risk by 
increasing the safety and efficiency of the OTC derivatives market. Reaching this 
general objective requires the realisati on of the following more specific policy 
objectives: 
(1) increase the transparency of the OT C derivatives market for regulators, 
market participants and the public; 
(2) reduce the counterparty credit risk associated with OTC derivatives; 
(3) reduce the operational risk asso ciated with OTC derivatives. 
As indicated in the introducti on, this report is principa lly concerned with problems 
that can be solved through the use of post-trading market infrastructure. With this in mind, the specific objectives listed above re quire the attainment of the following 
operational objectives: 
(1) obtain complete and comprehensive information on OTC derivatives 
positions; 
(2) increase the use of CCP clearing; 
(3) improve bilateral clear ing practices; and  
(4) increase the standardisation of OTC derivatives contracts and processes. 
Counterparty credit risk can be managed either centrally, i.e. through a CCP, or 
bilaterally. In other words, an OTC deriva tive can be cleared either through a CCP or 
bilaterally.  From the point of view of a single contract , operational objectives 2 and 
3 are mutually exclusive. However, as al ready indicated, not a ll OTC derivatives are 
suitable for CCP-clearing. This is why it is  still possible to de fine both operational 
objectives. 
. Operational objective 4 has an impact on the other th ree operational objectives in 
the sense that achieving the former facil itates the achievement of the latter (this 
relationship is marked in Figure 11 by the dashed arrows). 
An overview of the various objectives and th eir interrelations is depicted in Figure 11 
below. 
 
EN 33   EN Figure 11: The objectives and their interrelation 
Increase the safety 
and efficiency of the 
OTC derivatives 
marketIncrease the 
transparency of the 
OTC derivatives 
market
Reduce the 
counterparty credit 
risk associated with 
OTC derivatives
Reduce the 
operational risk 
associated with OTC 
derivativesObtain complete 
and comprehensive information on OTC 
derivatives positions
Increase the use of 
CCP clearing
Improve bilateral 
clearing practices
Increase the 
standardisation of 
OTC derivatives 
contracts and 
processesGeneral 
objectivesSpecific 
objectivesOperational
objectives
Increase the safety 
and efficiency of the 
OTC derivatives 
marketIncrease the 
transparency of the 
OTC derivatives 
market
Reduce the 
counterparty credit 
risk associated with 
OTC derivatives
Reduce the 
operational risk 
associated with OTC 
derivativesObtain complete 
and comprehensive information on OTC 
derivatives positions
Increase the use of 
CCP clearing
Improve bilateral 
clearing practices
Increase the 
standardisation of 
OTC derivatives 
contracts and 
processesGeneral 
objectivesSpecific 
objectivesOperational
objectives
 
4.2. Consistency of the objectiv es with other EU policies 
On the one hand, the identifie d objectives are coherent with the EU fundamental 
goals to promote a harmonious and sustaina ble development of economic activities, a 
high degree of competitiveness, and a hi gh level of consumer  protection, which 
includes safety and economic interests of citizens (Article 169 EC TFEU). 
On the other hand, these objectives are c onsistent with the reform programme 
proposed by the European Commission to driv e the EU out of the financial crisis. As 
an essential element contributing to a stable financial sector, attaining these objectives is a prerequisite for building a sustainable recovery.
106 They are also 
consistent with the policie s that were announced in the various Communications 
mentioned in the introduction of this report. 
                                                 
106  Communication for the spring European Council, Driving European recovery - COM(2009) 114. 
 
EN 34   EN  
5. POLICY OPTIONS AND POLICY INSTRUMENTS  
5.1. Policy options and their scope 
In this chapter we examine the various polic y options that have been considered in 
order to give effect to the four operati onal objectives described in the previous 
section and depicted in Figure 11. Alt hough the operational objectives in question 
seem to address somewhat different issues, they are in fact intertwined and seek to 
provide coherent and comprehensive solutions  to the same underlying issues. Before 
defining the policy options, it is important to  point out that these will set out broad 
principles rather than detailed measures. The more detailed measures will need to be defined at a later stage, most likely th rough Commission delegated and implementing 
acts. Their impacts will be analysed in  accordance to established rules. 
5.1.1.  Options for objective 1 – Obtain complete and comprehensive information on OTC 
derivatives positions 
Two aspects need to be considered in the context of objective 1. The first one 
concerns the question about the way in  which the information on positions or 
alternatively the information needed to cal culate the positions should be collected. 
The possible policy options addressing the first aspect are the following: 
• Option 1.1:
 Rely on existing initiatives (= baseline scenario). 
• Option 1.2.:  Obtain additional commitments from the industry. This option could 
include the broadening of the personal scope, i.e. extending them to additional 
market participants, or the material scope of the commitments, i.e. extending them to additional types of OTC derivatives, or both. 
• Option 1.3.:
 Require market participants to report all the necessary information on 
their OTC derivatives portfolios directly  to the competent regulator(s). As 
explained in section 3, regul ators already have the power to ask the entities they 
regulate for all the information they need  to perform their duties. This option 
should not be read as simply maintaining the status quo, but rath er as a change of 
approach from the current "pull" (require the information on an ad-hoc basis) to 
"push" (require regular reporting). 
• Option 1.4.:  Require market participants to report all the necessary information on 
their OTC derivatives portfolios to a trade repository. 
• Option 1.5.:  Introduce a reporting requirement  combining options 1.3. and 1.4. 
This option takes into account  the possibility that a trad e repository may not exist 
or, in case it does exist, that it may not be either willing or able to accept the 
information reported by the regulated entity. 
The second aspect concerns the question of th e level of detail of the information that 
each group of stakeholders (regulators, mark et participants and the public) should 
receive. Its scope can actually  be narrowed to just market participants and the public 
since regulators need to be able to access any information they deem necessary to 
 
EN 35   EN carry out their responsib ilities. The possible policy options  addressing this aspect are 
the following: 
• Option 1.6:  Rely on existing initiatives (= baseline scenario). 
• Option 1.7.:  Require the publication of aggr egate position information. The 
aggregation could be done by market segm ent (e.g. interest ra te derivatives), 
product (e.g. a particular single-name CD S), group of market participants (e.g. 
banks) or any combination thereof. 
• Option 1.8.:  Provide both aggregate and i ndividual position information. The 
latter refers to positions of  individual market participan ts that could be published 
either with or without a certain lag (e.g. a month). 
5.1.2.  Options for objective 2 – Increase the use of CCP clearing 
The possible policy options for achievi ng this objective are the following: 
• Option 2.1. : Rely on existing regulatory incentives and initiatives to increase the 
use of CCP clearing (= baseline scenario). 
• Option 2.2.:  Obtain additional industry commit ments on the use of CCP clearing. 
This option could include the broadeni ng of the personal scope, i.e. extending 
them to additional market participants, or  the material scope of the commitments, 
i.e. extending them to additional types of  OTC derivatives, or both. Furthermore, 
it could include the "tightening" of existing commitments (e.g. increasing the 
proportion of total trades that would need to be cleared). 
• Option 2.3.:  Provide additional regulatory incentives for the use of CCP 
clearing.107 These could include, for example, measures aimed at increasing the 
safety of CCPs or measures facilita ting the use of CCPs by smaller market 
participants. This option should be seen  as a complement to options 2.1. and 2.2. 
• Option 2.4.:  Require the use of CCP clearing for OTC derivatives that meet 
predefined eligibility criteria. The criter ia should include those that are usually 
used by a CCP when it considers the possibility of clearing of a particular contract. These include, among others, th e liquidity of the contract and the 
availability of pricing information. 
• Option 2.5.:
 Require the use of CCP clea ring for all OTC derivatives. 
At least some of the above opti ons are not mutually exclusive. 
5.1.3.  Options for objective 3 – Impro ve bilateral clearing practices 
The possible policy options for achievi ng this objective are the following: 
                                                 
107  Regulatory incentives for the use of CCPs already exist. Certain market  participants (e.g. banks) are not 
required to set aside regulatory capital for exposures that they have with a CCP complying with certain 
conditions.  
 
EN 36   EN • Option 3.1.:  Rely on existing initiatives to improve bilateral clearing practices (= 
baseline scenario). 
• Option 3.2.:  Obtain additional commitments from  the industry to improve bilateral 
clearing practices. This opti on could include the broadeni ng of the personal scope 
of the commitments or their "tightening" (e.g. shortening the cycles of the various 
processes) or both. 
• Option 3.3.:  Set specific targets for the bilate ral clearing of OTC derivatives 
transactions. One possible set of targ ets could, for example, address the 
measurement, monitoring and mitigation of  counterparty credit risk associated 
with bilaterally-cleared OTC derivatives. 
• Option 3.4.:  Prescribe the methods that should be used in the context of the 
bilateral clearing of OTC derivatives transactions. 
5.1.4.  Options for objective 4 – Increase the standardisation of OTC derivatives contracts 
and processes 
As argued earlier, the main focus is on co ntract and process st andardisation. With 
this in mind, the possible policy options are the following: 
• Option 4.1.:  Rely on existing initiatives to increase contract and processes 
standardisation (= ba seline scenario). 
• Option 4.2.:  Obtain additional industry commitments to increase contract and 
processes standardisation. This option could include the broadening of the 
personal scope or the material scope of the commitments (i.e. the processes that 
need to be improved). Furthermore, it c ould include the "tight ening" of existing 
commitments (e.g. lowering the allowed number of outstanding unconfirmed 
trades). 
• Option 4.3.:  Set specific targets for contra ct and process standardisation. 
• Option 4.4.:  Require the use of standard legal contracts and processes defined at 
EU level. 
5.2. Policy instruments 
5.2.1.  The available set of policy instruments 
In general, the Commission's "toolbox" c ontains the following policy instruments: 
• Communication, 
• Recommendation, 
• Directive, and 
• Regulation. 
 
EN 37   EN The Commission can also encourage the priv ate sector to pursue self-regulation in 
certain cases. Finally, the Co mmission may decide not to pursue any kind of action at 
the EU level (this is the "do nothing" option). 
 
 
EN 38   EN  
6. ANALYSIS OF IMPACTS AND CHOICE OF PREFERRED OPTIONS AND INSTRUMENTS  
6.1. Analysis of impacts 
Most of the options that w ill be analysed below (the exceptions are option 1.1. – 1.8.) 
are subject to so-called network effects (o r network externalities). This means that 
the more market participants will adopt a particular process or practice, the higher 
the benefits for each market participant that adopted them will be.108 At the same 
time, the attractiveness of the process or pr actice for those that have not yet adopted 
them will increase as well. 
Most of the analysis in this section is quali tative rather than quantitative. To a great 
extent this is due to i) the difficulty in obt aining quantitative data  and ii) the lack of 
information on certain parameters that will become known only in the coming 
months as a consequence of the definition of technical standard s (as explained in 
section 4) or of other legislative initia tives that the Commission will pursue in the 
area of OTC derivatives. 
6.1.1.  Options for operational objective 1 (information on positions) 
6.1.1.1.  Option 1.1. (rely on existing initiatives) 
This option involves no action at EU level,  but rather relies on action at Member 
States' or industry level. As indicated in section 3 there are currently a number of 
ongoing industry initiatives that have as a goal to increase the amount of available 
information on OTC derivatives positions. The initiatives have already led to substantial increases in the transparency for credit and interest rate derivatives.
109 
Both trade repositories curr ently hold information about  the great majority of 
outstanding contracts and ar e being actively accessed by regulators in search of 
information. Since the information is collected  in a central point, this facilitates the 
regulators job, as it spares them from ha ving to compile individual information on 
their own. Furthermore, since both reposit ories publish aggregate data (with quite 
detailed breakdowns), the transparency for the general public has increased as well. 
According to information available to the Commission services, the average annual 
cost of maintaining a contract in a trade repository (i.e. the price a market participant needs to pay) varies depending on the asset cl ass. In case of interest rate derivatives 
it amounts to a few euro cents per contract wh ile for credit deriva tives it amounts to a 
few euro per contract. The forthcoming tr ade repository for equity derivatives is 
expected to be pos itioned somewhere between the two. The differences in the 
average prices are mainly due to the services  that these prices cover. For the credit 
derivatives repository the price covers a service package that in addition to the 
"recordkeeping" service also includes seve ral operational services (e.g. credit event 
processing, settlement calculations). For the interest rate derivatives repository, the 
price covers solely the "recordkeeping" service. 
                                                
 
108  The telephone network is the classical ex ample used to illustrate network effects. 
109  Once the trade repository for equity derivatives w ill be up and running, transparency for this type of 
products should increase as well. 
 
EN 39   EN While the current initiatives already manage d to deliver important results they are 
not without shortcomings: 
(1) Limited scope, both personal and material.  As concerns the personal scope, the 
commitments are currently limited to the OSC members. The market coverage provided by the trade repositories theref ore depends on the market shares of 
the OSC members, in particular the G14 (see Figure 12 belo w for an overview 
of the market shares of the various cat egories of market participants). For 
example, in the CDS market, where co ntracts that have at least one OSC 
member as a party represent the great majority of the market, coverage is very high.
110 In another market, where the we ight of OSC members might be 
significantly lower (e.g. interest rates), market coverage would be incomplete. 
As concerns the material scope, the current commitments do not foresee the 
creation and use of trade repositories for foreign exchange and commodity 
derivatives. This means that the current initiatives will not lead to a complete 
and comprehensive coverage of th e entire OTC derivatives market. 
Figure 12: Market concentration in the OTC derivatives market: evolution of market 
shares (left) and market shar es as of December 2009 (right) 
Note : Data are compiled from a survey among about 55 dealer s. Data are "netted" to account for double-counting 
resulting from positions betw een reporting institutions.111 Notional amounts outstanding are adjusted by halving 
positions vis-à-vis other reporting dealers. The data do not  distinguish as to whethe r these OTC contracts are 
centrally or bilaterally cleared. The left panel does not include data for commodity derivatives. 
Source: BIS, Commission services calculations 
(2) Issues related to data protection.  Since there is no legal requirement backing 
the reporting process, a pa rty to the contract may be  unable to report the 
identity of its counterpart because of data protection issues (the counterpart 
                                                 
110  As long as at least one of the two counterparties to a contract reports that contract  to a trade repository, the 
details of that contract will be known. 
111  Reporting dealers are mainly large commercial and in vestment banks and securities houses that participate 
in the inter-dealer market and/or have an active bu siness with large customers, such as large corporate 
firms, governments and other non-repo rting financial institutio ns. "Other financial institutions" are smaller 
commercial banks, investment banks and securities houses , and in addition funds (mutual, pension, hedge, 
etc.), building societies, leasing comp anies, insurance companies, financia l subsidiaries of corporate firms, 
and central banks. Non-financial institutions are mainly non-financial end users, such as corporates and 
governments.  
 
EN 40   EN may not give permission to have his or he r name disclosed; it may even be that 
the law prevents this disclosure). If the two parties to a contract both report the contract then this situation could potentially result in an artificial inflation of the overall market size (if neither would reveal the iden tity of its counterparty, 
then the contract would be counted twice) . If only one of th e parties reports, 
the consequences of this situation woul d be more severe: the usefulness of the 
information stored in the trade repository would be reduced (the size of the position would be known while the counterpa rt to the position would not) and 
would require regulators to s eek the information directly. 
(3) Non-binding nature of the commitments . Not honouring a voluntary 
commitment does not carry any particular sanction with it. Therefore, there is nothing that compels a market participan t to honour the commi tment in full or 
to prevent him or her from walking away from it at any point in time. 
(4) Inability of a trade reposito ry to "capture" a contract.  Contracts may be so 
bespoke that a trade repository may not be  able to process them. In such cases, 
under the current commitments, such c ontracts would remain unreported. If 
their number is high enough, the overall transparency would be lower than 
desired. 
6.1.1.2.  Option 1.2. (obtain additional commitments from the industry) 
On the benefits side, this option would permit to close, either partially or completely, 
the gaps in the scope of the current initi atives, thus increasing the transparency 
compared to option 1.1. Regulators would gain  a more complete picture of the OTC 
derivatives market. To the extent that a certain level of sta ndardisation would be 
needed in order to deliver on the commitm ent, it would increase the standardisation 
in the additional market segments it would cover and could therefore also result in a certain amount of streamlining of the proce sses used by market participants. Finally, 
and less importantly, it would also creat e revenues for the operators running the 
additional trade repositories. 
On the costs side, there would be the one -off investment cost of creating the new 
trade repositories. In terms of costs for mark et participants, a distinction needs to be 
made between those already subject to an  existing commitment and those who are 
not. The former would incur additional costs in the form of connection costs to the 
new trade repositories (both one-off and recurring), and additional fees that would need to be paid to the new trade repos itories for maintaining the information. 
Furthermore, they may incur the cost of hiring additional staff to handle the reporting 
process related to contracts to be re ported to the new trade repositories.
112 
                                                 
112  This would very much depend on the type of information that would need to be reported. In case of 
reporting of positions, the information should already be available to the reporting entities, so no 
significant additional costs should be involved. If, conversely, information on single contracts would need 
to be reported, the bulk of the work would need to be done at the beginning because of the need to report the details of outstanding contracts. This burden could, however, be distributed over a certain period of 
time, which would likely eliminate the need to hire  additional staff. Once this first phase would be 
concluded, the reporting of new contracts should not require any additional resources. 
 
EN 41   EN The latter would incur the same type of costs and, assuming they would have to 
report the same volume of information as ma rket participants already subject to an 
existing commitment, the same level of costs. Both categories would therefore incur higher total costs th an under option 1.1. 
The information on the fees charged by the ex isting trade repositories is not publicly 
available, but according to the informati on provided to the Commission services the 
fees do not appear to be particularly hi gh. The overall impact on the costs of this 
measure should therefore be relatively lim ited. This cost impact, especially for 
smaller market participants, could be m itigated significantly by allowing them to 
delegate the reporting to their counterpartie s. In most cases the delegation would be 
to bigger institutions with whom small ma rket participants usually enter into OTC 
derivative contracts and who are better adapte d to shoulder the costs of the reporting. 
In case these bigger institutions already vol untarily report their contracts, then the 
marginal cost of reporting on behalf of their counterpartie s would be very small, if 
not even zero. 
Finally, this option would not solve shor tcomings 2, 3 and 4 described under option 
1.1. 
6.1.1.3.  Option 1.3. (require direct reporting to regulators) 
This option has a number of benefits compared to option 1.1. Firstly, it would resolve 
shortcomings 2 (data protection) and 3 ( non-binding nature of commitment) since the 
reporting would be required by law. It would also resolve shortcoming 4 (inability of 
trade repository to "capture" a contract) as, in principle, a supervisor should be able to receive all information, including the on e on bespoke contracts. Whether or not it 
would solve shortcoming 1 (limited scope) would largely depend on the ability of 
obtaining information from non-regulated entities (i.e. non-financial institutions).
113 
If not all market particip ants could be captured, then the coverage would be 
potentially incomplete. In any case, the market coverage would be certainly no 
lower, and quite probably higher than under option 1.1. Combining all these elements means that the level of transparency unde r this option would be  greater than under 
option 1.1. 
Secondly, this option should entail much  lower reporting costs than option 1.1. 
Indeed, reporting to regulators does not re quire the payment of fees and the reporting 
channels are already established, so pr esumably no additional connection costs 
would be necessary. The costs should be re duced even further by the fact that the 
number of competent regulators may in the end be smaller than the number of trade repositories.
114 
                                                 
113  The problem would actually be limited to contract s where both counterparties are not regulated. Those 
contracts where one counterparty is a regulated entity an d the other one is not, would still be reported by 
the former.  
114  The current market consensus view seems to be that there will be only one trade repository per segment, so 
potentially 5 in total. On the regulators' side, a re gulated entity could, in principle, report all the 
information to a single regulator. The picture may get a bit more complex if transaction reporting is also 
taken into account, as then the regulated entity may have  to report to two differe nt regulators (positions to 
one and transactions to the other). For at least some types of OTC derivatives (e.g. energy derivatives), 
more then one regulator may be interested in the information which could require reporting to multiple 
 
EN 42   EN Finally, in case the information under opti on 1.1. is reported to a trade repository 
located in a jurisdiction different from the one of the regulator requesting the information, then under this option the latt er would not have to enter into an 
information-sharing agreement with the regula tor of the trade reposit ory to be able to 
access it. 
This option has also a number of disadvant ages compared to op tion 1.1. First, unless 
a way would be found to accommodate
115 the way reporting is done under current 
initiatives it would lead to  a duplication of reporting channels and perhaps even 
discourage market participants from using tr ade repositories. To the extent that trade 
repositories support other processes (e.g. cr edit event processing for CDS), this 
would not be a positive development. 
Second, it would lead to a fragmentation of  information for regulators. Moreover, to 
the extent that different information (or information in different format) would be 
reported to different regulato rs, piecing together a comple te picture would become a 
challenging task. This problem would be part icularly acute for market regulators and 
systemic risk regulators, but could also prove significant for pr udential regulators of 
large groups active in multiple jurisdictions. 
Last, but not least, the resources that regul ators currently have at their disposal may 
turn out not to be sufficient to deal with  the potential flood of information that would 
result from this requirement. This would m ean that regulators would either need to 
increase their resources (which would mean an increase in costs for them) or risk to 
end up in a situation in which they would be unable to take full advantage from the 
increased transparency. 
6.1.1.4.  Option 1.4. (require reporti ng to trade repositories) 
Similarly to the previous option, this one  would eliminate shortcomings 2 (data 
protection) and 3 (non-bindi ng nature of commitment)  of option 1.1. However, 
unlike the previous option, it would not elim inate shortcoming 4 (inability of trade 
repository to "capture" a contract). Simila rly to the previous option, whether this 
option would be able to completely elim inate shortcoming 1 (limited scope), would 
very much depend on the ability of legisl ation to capture currently non-regulated 
market participants. 
In terms of benefits, theref ore, the level of transpar ency under this option would 
probably be close to, but slightly be low option 1.3., since the number of highly 
bespoke contracts that could not be captu red by a trade reposito ry is probably not 
very high. An additional benefit would be the centralisation of all the data, which 
would significantly reduce, if not eliminate, the costs th at regulators  would incur 
under option 1.3. 
                                                                                                                                                         
regulators. This problem could be mitigated, at least in part (depending on what type of information is 
sough by each regulator), through informati on-sharing agreements between regulators. 
115  For example, by considering that reporting the info rmation to a trade repository is compliant with the 
requirement, provided  that the regulator has unencumbered access to the information stored in the trade 
repository. 
 
EN 43   EN In terms of costs, it woul d entail the same type of co sts as option 1.2., but probably a 
higher level of overall costs due to the broader scope (however, due to economies of scale, the increase in the overa ll costs should be contained). 
The above analysis presupposes that there would be only one trade repository per 
market segment. If this out not to be th e case, then the costs of this option would 
probably be higher (higher overall invest ment costs by trade repositories, lower 
economies of scale and hence potentially high er fees charged by trade repositories, 
higher fragmentation of data). 
6.1.1.5.  Option 1.5. (require reporting to trade repositorie s or, if that is not possible, directly 
to regulators) 
This option has the same costs as optio n 1.4., but higher benefits, as it would 
eliminate shortcoming 4 (inability of trade repository to "capture" a contract). Since the amount of contracts that could not be captured by a tr ade repository would 
probably be limited, regulators would most likely not need to employ significant 
additional resources to deal with them . Provided that the information on these 
“residual” contracts would be reported in the same format as the information on the 
contracts reported to the trade repositories , then the effects of fragmentation would 
be limited. 
Table 3: Summary of the impact analysis for operational objec tive 1 (information on 
positions) – how to report 
 Impact on stakeholders Effectiveness Efficiency 
Option 1.1. (baseline) n.a. n.a. n.a. 
Option 1.2. 
(obtain additional 
commitments) (+) regulators gain more 
complete picture 
(+) revenues for trade 
repositories 
(-) higher costs for 
reporting institutions (≈/+) While increase scope of 
reporting data protection 
barriers will remain and it will be difficult enforcing non-
binding commitments. 
Moreover, some contracts may 
not be captured (≈/+) higher set-up and 
ongoing costs would be at 
least offset by the benefits 
Option 1.3. 
(report to regulators) (++) regulators gain more 
complete picture 
(+) cheaper to report for 
regulated entities 
(-) costlier to manage for 
regulators 
(≈/-) potential loss of 
revenue for trade 
repositories 
 (≈/+) While resolve data 
protection barriers, 
enforceable, capture all contracts there will potentially 
be duplication of reporting 
channels and fragmentation of information/difficulty gain 
overall picture of market. 
Market coverage depends on 
definition of regulated entity. (≈/-) lower reporting costs, 
but costly for regulators to 
manage received 
information 
Option 1.4. 
(report to trade 
repositories) (+/++) regulators gain 
more complete picture 
(+/++) revenues for trade 
repositories 
(-) higher costs for 
reporting institutions (+/++) It resolves data 
protection barriers, it is 
enforceable but some contracts may not be captured by trade 
repositories. Market coverage 
depends on definition of regulated entity. Potential issue 
of fragmentation of information 
in case of multiple trade 
repositories (≈/-) higher set-up and 
ongoing costs, but likely to 
be limited 
Option 1.5. 
(1.3. + 1.4.) (++) regulators gain more 
complete picture 
(+/++) revenues for trade 
repositories 
(≈/-) costlier to manage for 
regulators (++) It resolves data protection 
barriers, is enforceable and 
will capture the great majority of contracts. Market coverage 
depends on definition of 
regulated entity. Some fragmentation possible, but (≈/-) set-up and ongoing 
costs, but likely to be 
limited 
 
EN 44   EN (-) higher costs for 
reporting institutions 
 likely to be fairly limited. 
 
6.1.1.6.  Option 1.6. (rely on existing initiatives) 
As explained in section 3, many of the market infrastructures (CCPs and trade 
repositories) are already maki ng some sort of aggregate in formation available to the 
public. Pursuing no action at EU level would not change this. 
6.1.1.7.  Option 1.7. (require the publication of  aggregate position information) 
This option could involve two additional bene fits when compared to option 1.6. First, 
to the extent that some market infrastructures do not publish a ggregate data, 
requiring its publication would increase the amount of info rmation available to the 
public. Second, in case the publi cation of data broken down to  a more detailed level, 
that is currently not  published, would be required (e.g. data on contracts denominated 
in particular currency, or on a particular underlying, or he ld by a particul ar category 
of market participants) this  would again increase the amount of information available 
to the public. 
This option would not involve  any significant additional costs compared to option 
1.6., neither for those requ ired to publish the information (either market 
infrastructures or regulators ) nor for those receiving it. 
6.1.1.8.  Option 1.8. 
In terms of benefits, the publication of da ta on individual positions would enable any 
market participant to estimate better the count erparty credit risk it is exposed to when 
dealing with a particular counterparty and would therefore allow it to secure itself 
better against this risk. 
As for costs, similarly to option 1.7., th e publication costs would be marginal at 
worst. However, disclosing information about individual positions would mean 
disclosing the trading strategies of single participants thus pot entially discouraging 
them from trading in the first place. One way of addressing this  issue could be to 
publish data with a lag. However, doing so, esp ecially if the lag would be substantial, 
would rob the data of any meaning. 
Table 4: Summary of the impact analysis for operational objec tive 1 (information on 
positions) – level of public di sclosure of information 
 Impact on stakeholders Effectiveness Efficiency 
Option 1.6. (baseline) n.a. n.a. n.a. 
Option 1.7. 
(Aggregate positions) (+) increase information 
available to public and to 
market participants (+) more transparency ( ≈) no significant additional 
costs 
Option 1.8. 
(Aggregate + individual 
positions) (+/++) more information 
available to the public, 
enable market participants to better assess counterparty risk 
(-/--) disclose trading 
strategies of market (++) more transparency, better 
assessment of counterparty risk, 
which enables better management 
of risk (-/--) no significant cost of 
publication, but potentially 
significant impact on 
liquidity of the market 
 
EN 45   EN participants 
 
6.1.2.  Options for operational obj ective 2 (use of CCPs) 
Before starting the analysis of costs and benefits of each policy option, it may prove 
useful to list the benefits associated with CCP clearing, since these are equally valid 
across the various options. Th e benefits are as follows:116 
(1) it facilitates counterparty credit risk mitigation; 
(2) it allows mutualisation of losses; 
(3) it has a positive effect on market liquidity; 
(4) it solves disruptive information problems; 
(5) it increases operational efficiency; and 
(6) it allows regulatory capital savings. 
Due to the above, the use of CCPs is expected both to he lp reduce the probability of 
default of individual members and reduce the probability of market failure due to the 
default of a major market participant. 
From the point of view of individual mark et participants, the decision on whether to 
use a CCP for clearing a particular class of  OTC derivatives as opposed to clearing it 
bilaterally will also depend on the tr ade-off between two types of netting 
opportunities: bilateral net ting between pairs of count erparties across different 
classes of OTC derivatives, versus multilateral netting among many clearing 
participants across a single class of OTC derivative (e.g.  CDS). A market participant 
will find CCP clearing attractive if gains from multilateral netting will be greater 
than the losses in bilateral netting opport unities that would result from the removal of 
the CCP-cleared asset class from the original bilateral netting set.117 
6.1.2.1.  Option 2.1. (rely on existing regulato ry incentives and initiatives) 
As explained in section 3, there are various initiatives aimed at increasing the use of 
CCPs for clearing OTC derivatives. The exis ting industry commitments in terms of 
clearing have already delivered improvement s in terms of the proportions of the CDS 
and interest rate derivatives markets th at are being cleared (see figures 7 and 8 
respectively) and all the bene fits this brings with it.118 
Since the current commitments apply to G 14 members only (i.e. the large dealers), 
the bulk of the analysis will be focused on their costs and benefits. In terms of one-
                                                 
116  For more details see Bliss, R. and C. Papathanassiou (2006), Derivatives clearing, central counterparties 
and novation: The economic implications. Available at  
http://www.ecb.europa.eu/event s/pdf/conferences/ccp/ BlissPapathanassiou_final.pdf. 
117  Duffie, D. and H. Zhu (2009), Does a Centra l Clearing Counterparty Reduce Counterparty Risk? 
118   According to very rough estimates, the shares (by notional amount) of OTC derivatives that are currently 
centrally cleared are 30% for interest rates,  10-15% for CDS and 20-30% for commodities. 
 
EN 46   EN off costs, moving to CCP clearing has certa inly required investment to adapt their 
systems and to connect to the CCPs.119 Dealers also have to pay clearing fees to the 
CCP. An important part of the costs that  CCP clearing involves are the net funding 
costs120 of the collateral paid to the CCP in the form of initial margins and 
contributions to the default fund of the CCP.121 For example, for the three largest 
CCPs clearing OTC derivatives (ICE Cl ear Europe and ICE Trust for CDS, 
SwapClear for interest rate swaps) the combined default fund and initial margin 
contributions of its members (i.e. the dealers) amount to approximately €15.1 
billion.122 Currently, the net funding cost associ ated with this am ount should not be 
more than a few hundred million euro. 
The benefits for CCPs offering clearing solu tions for OTC derivatives are in the form 
of clearing fees they receive from their me mbers and from the net interest they earn 
on the collateral posted by their members. 
In spite of the improvements associated with the current initiatives, they also have 
important shortcomings: 
(1) Limited scope, both personal and material.  This is the most important 
shortcoming of the existing initiatives. The personal scope is limited to the 
G14 members. The impact of the limited personal scope of th is option is much 
more significant that in the case of the reporting (transparency) commitments. 
The reason is straightforward: a market  participant can report the information 
on a particular OTC derivative contract i rrespective of whether its counterpart 
does the same. This is not possible in a CCP-clearing environment, where both 
counterparts must agree to the contract's  submission to a CCP. Therefore, for 
the same market segment, the coverage  of the reporting commitments is going 
to be higher than that of the clearing  commitments. Given the personal scope 
of the latter, the maximum level of coverage that can be achieved is all the contracts between dealers. 
The material scope is limited to credit derivatives and interest rate derivatives 
(there is also a commitment for commodity  derivatives, but it is a generic one, 
without any particular targets). In addition, the material scope depends on the definition of eligible contract, since the commitments specify targets for clearing this type of contract s. To the extent that contract eligibility is defined 
in a way to capture just a subset of th e contracts that a CCP can safely clear, 
then less contracts would be cl eared than would be possible. 
(2) Non-binding nature of the commitments.  Not honouring a voluntary 
commitment does not carry any particular sanction with it. Therefore, there is 
                                                
 
119  At least in case of interest rate swaps, a substan tial portion of the market wa s already cleared before the 
onset of the crisis, so most of the related costs have been incurred before the crisis as well. Moreover, for 
CDS, the major dealers leveraged, to the greatest exte nt possible, the existing infrastructure in order to 
minimise these costs. 
120  The costs of borrowing the funds needed minus any interest that the CCP may pay on the collateral it 
receives. 
121  There are no additional costs related to the provision of variation margin as the latter is also used in the 
bilateral clearing model. 
122  This amount currently covers contributions made by all clearing members of the three CCPs involved, not 
just the G14 (although they represent the bulk of the contributions). 
 
EN 47   EN nothing that compels a market participan t to honour the commi tment in full or 
to prevent him or her from walking away from it at any point in time. 
6.1.2.2.  Option 2.2. (obtain additional industry commitments) 
This option would consist in providing specific targets fo r clearing commodity, 
equity and foreign exchange derivatives, or  including market participants other than 
large dealers in the scope of the current  initiatives, or potentially both. For the 
broadening of the material scope, it needs to be pointed out that the target would not 
be perfect coverage since there are OTC de rivatives out there that are simply not 
suited for CCP clearing. 
The expansion to commodity and equity de rivatives could probably rely on existing 
CCPs that already provide clearing services for this type of derivatives. For foreign 
exchange derivatives, the service would need  to be developed. Hence, the latter case 
would involve higher ini tial investment costs. 
A recent paper published by the International Monetary Fund123 tried to estimate 
what would be the cost impact of moving tw o thirds of the OTC derivatives market 
to CCP clearing. The author of the paper comes to the conclusion that the move would require and additional $170 billion to $22 0 billion of collatera l (in the form of 
initial margin and contributions to the de fault fund of a CCP) from large financial 
institutions.
124 This number should be taken with a bit of caution and should 
probably be seen as the upper bound estimate of the amount of additional collateral 
needed.125 As the author himself acknowledges, it needs to be noted that the true cost 
of the move would not be the estimated amount, but rather the net funding cost 
associated with obtaining it. Furthermore, it is quite likely that such high coverage 
would involve the inclusion of contracts wher e at least one of th e counterparts is not 
a dealer (see figure 12). This means that the amount estimated above would not fall 
exclusively on large financial institu tions, but also on their clients. 
There are at least two possible ways to look at the implications of  the above estimate. 
One is that the large financial institutions could use the money in alternative (i.e. more profitable) ways (for example they could lend it to  a business or they could 
engage in additional trading). This interpre tation would mean that the cost of the 
move to CCP clearing would be equal to  the "net" opportunity cost of the 
collateral.
126 The other is that up to $220 billion in additional money is available to 
prevent that a localised shock (the default of  a market participant) is spread to the 
entire financial system. 
The impact of expanding the personal scop e of the existing commitments would very 
much depend from one type of institution to another. For example, a fund that enters 
                                                 
123  Singh, M (2010), "Collateral, Netting and Systemic Risk in the OTC Derivatives Market", IMF Working 
Paper. http://www.imf.org/external/pubs/ft/wp/2010/wp1099.pdf. 
124  For the individual market segments, the numbers are $40-$80 billion for CDS, $40-$50 billion for interest 
rate swaps, $90 billion for the remaining market segments. 
125  For example, the estimate does not include the potential savings in collateral coming from higher netting 
efficiency. Indeed, including more contracts increases  the probability that more of them will offset one 
another and could therefore be netted. 
126  The difference between the foregone return on the alternative investment and the actual return made on the 
collateral. 
 
EN 48   EN in an OTC derivative contract already has to put up both initial and variation margin 
for the OTC derivatives contracts it enters  into. This would not change in a CCP 
environment. Nevertheless, there may still be some additional costs involved for the fund. In a bilateral clearing s ituation, the fund's counterpart y could use the collateral 
given by the fund quite freely and earn a return on it. In  a CCP environment, the 
fund's counterparty would lose  at least some of that lib erty, and hence some of the 
associated returns, because at least some of the collateral would need to be posted 
with the CCP.
127 The fund's counterparty may then try to compensate this shortfall 
by, for example, increasing the (implicit of  explicit) fees it charges to the fund. 
Another potential source of costs for the fund is related to the t ype of collateral it 
posts with the dealer. Compared to a CCP, a dealer usually accept s a wider variety of 
collateral to secure OTC derivatives deals.128 Assuming that a fund would not have 
sufficient collateral of the type accepted by a CCP, it would have two choices. On the 
one hand it could try and find the necessary  collateral on its own (e.g. by using the 
repo market). On the other hand it may give to the collateral to the dealer. Since the 
dealer would not be able to  reuse the collateral with  the CCP, it would need to 
provide the suitable type of collateral  itself. The cost of this "collateral 
transformation" would be charged to the fund(e.g. by applying a higher haircut to the 
collateral it provides). In bot h cases, CCP-clearing would en tail higher costs for the 
fund. 129 This problem could potentially be solved by allowing CCPs to accept a 
broader variety of collateral (with appropriate haircuts). 
The implications for non-financial institutions (NFIs) may be much more significant. 
NFIs usually do not provide any collateral to  secure the OTC derivatives transactions 
that they have entered into. This would change in a CCP environment, where an NFI would be asked to provide both initial and variation margin. The former can be seen 
as an upfront cost of CCP clearing; the la tter introduces a certai n level of cash flow 
volatility. Both need to be funded, which entails  costs. That is not to say that bilateral 
clearing is cost-free for NFIs. By not requi ring any collateral from an NFI the dealer 
basically provides it with an  implicit credit line.  The implicit credit line involves 
certain costs for the dealer,
130 so the latter will try to pass them on to the NFI by 
including it in the transaction fee. Th e cost of moving to CCP clearing would 
therefore need to be compared to the implic it cost that is currently paid by the NFIs, 
to see what the net impact would be. 
The impact on the cash flows of NFIs also  needs to be taken into account. As 
mentioned earlier, the posting of variati on margin may, in times of heightened 
market volatility, could provide a substant ial drain on the liquidity of NFIs. This 
could be addressed by ensuri ng that an NFI has a credit line it can draw upon in case 
                                                 
127 The exact amount would depend on the extent to which the positions of the clients using the same dealer to 
access a CCP would offset one another (the dealer post the collateral based on his or her net position with 
the CCP). The higher the amount of offsetting contr acts, the lower the net position and the lower the 
amount of collateral that would need to be posted with the CCP. 
128 CCPs usually accept only the most liquid types of  collateral, i.e. cash and government bonds. 
129  According to the reply to the second public consultation submitted by the Investment Management 
Association, a pension fund’s return could be lowered by between 1.1 to 1.9 percentage points if it had to 
use the repo market to obtain the necessary cash to post as collateral with a CCP. 
130 The dealer has two basic choices: it can either hedge the cred it risk associated with the credit line, e.g. by 
purchasing a CDS, or it can decide not hedge in whic h case it will have to set aside regulatory capital. 
Either option involves costs for the dealer. 
 
EN 49   EN of need. This would, however, require the NF I to make the previously implicit credit 
line (which does not appear as debt on its balance sheet) explicit.  This could have 
negative implications for the credit rating of  the company. Furthermore, large swings 
in the market value of the derivative may l ead to margin calls that would exceed the 
limit of an NFI's existing credit line. This would force the NFI to either seek an 
extension of the existing credit line or to obtain a new one altogether. Within the short time limits of a collateral call, this may not be feasible or might prove costly, especially if the market itself is in turmoil. 
Last, but not least, CCP clearing requires market participants to have in place 
systems that allow them to cope with daily (or even intraday) margining. Many 
market participants currently do not have such systems and would therefore need to 
make investments in order to set them up. 
To the extent that the dealers would be willing to extend their commitments to OTC 
derivatives that are currently not covered and to the extent that there are market 
participants out there that would be will ing to adhere to the (old and/or new) 
commitments (they would only adhere if the net benefits would not  be negative), the 
benefits of this option would be larger than those of option 2.1. One benefit of the 
broadening of the personal scope would be that dealers would be able to clear more 
of their contracts and thus potentially bene fit from larger netting efficiencies. The 
associated total costs would also be hi gher then under option 2.1. This option would 
do nothing to solve shortcoming 2 (non-binding  nature of the commitment) of option 
2.1. 
6.1.2.3.  Option 2.3. (provide additiona l regulatory incentives) 
Within the scope of the measures that can be examined in this report, one additional 
incentive to encourage a wider adopti on of CCP clearing could be making CCPs 
safer by introducing strict safety requi rements for them. Another incentive, 
especially for those market participants th at would not meet the criteria to become 
members of a CCP and would therefore need  to access one only indirectly, through a 
general clearing member, would be to provide additional safeguards for the collateral they provide. 
In a voluntary setting, it is however unc lear whether such incentives would be 
sufficiently large to sway market pa rticipants into using CCP clearing.
131 Indeed, 
both solutions provide additi onal safeguards, but these safeguards come at a cost. 
Making a CCP safer might result in the CCP requiring higher margins from its 
members. Similarly, segregating client accounts may result in general clearing 
members charging higher fees to offset the loss of revenue that such solution would 
entail.132 
Overall, introducing such in centives may increase the numbe r of market participants 
using CCP clearing, and thus bring about hi gher benefits than option 2.1. However, it 
is difficult to gauge how many more woul d start using CCP clearing due to the 
incentives. 
                                                 
131  Existing incentives have had only a partial success in this regard. 
132 The analysis of the fund ex ample under option 2.2. is app licable in this case as well. 
 
EN 50   EN 6.1.2.4.  Option 2.4. (require the use of a CCP for eligible contracts) 
The selective approach of this  option can be seen as recognition of the fact that not 
all OTC derivatives may be suitable for CCP clearing. Of course, the requirement 
would only be applicable in case there would be a CCP offering the service. 
This option would apply to all OTC derivativ es that meet the pre-defined criteria 
and, in principle, to all market participants that trade them (eliminating shortcoming 
2 (non-binding nature of commitment) of option 2.1.). This means that the likely 
coverage of this option w ould be greater than the one  of option 2.1. The higher 
coverage would entail both higher bene fits in terms of overall reduction of 
counterparty credit risk, but  also higher costs than option 2.1. While it is quite 
probable that the net benefit for G14 member s would be positive (the additional costs 
would probably be lower than the benefits due to netting effects),133 the outcome for 
other market participants, espe cially the NFIs is less certa in (the benefits would be 
the ones typically associat ed with CCP clearing, the costs would be the ones 
described in the analysis of option 2.3.). Provided that CCPs would manage to attract 
a large enough volume of business, the net benefits would probably be positive also for them. 
Given the limited market share of NFIs, it is quite likely that the overall benefits 
would outweigh the costs of this option. 
6.1.2.5.  Option 2.5. (require the use of CCP clearing for all contracts) 
This option would require all market part icipants to clear all OTC derivatives 
through a CCP. In order for this option to be  materially different from option 2.4., the 
trading of an OTC derivative that could not be cleared th rough a CCP would need to 
be banned. This would result, on the one ha nd, in a situation wher e, all traded OTC 
derivatives would be cleared by a CCP and therefore the counterparty credit risk of 
the market participants woul d be substantially reduced (both by virtue of the CCP 
and by virtue of there being less contract s traded). On the other hand, it would, 
however, result in the reducti on of hedging possibilities for those market participants 
that have specific needs and may even l ead to less hedging overall. From the overall 
perspective of counterparty credit risk re duction, this option could be considered 
superior to option 2.1. However, this superi ority would need to be weighed against 
the lower hedging possibilities for market participants. 
It could happen that in th e scenario described above a CCP would be tempted to 
accept any OTC derivative for clearing in order to earn additional revenue. In principle, the CCP could prot ect itself against the higher risk inherent in the more 
complex OTC derivatives by asking markedly higher margins from its participants.
134 This could make these derivatives so expensive that market 
                                                 
133 Depending on the particular situation, the migration to a CCP may also entail savings in regulatory capital. 
134 The analysis of the scenario wh ere the CCP would actually ask for ma rgins that would not adequately 
cover the exposures of the CCP is not provided here, as it is assumed that regulators would prevent such scenario from materialising. However, should such a sc enario actually occur, then it is quite possible that 
the overall amount of risk in the system would actually increase, as th e CCP would be less safe due to its 
behaviour.  
 
EN 51   EN participants would be disc ouraged from using them. The end result would be the 
same as the one described in the previous paragraph. 
Table 5: Summary of the impact analysis for operational objectiv e 2 (use of CCPs) 
 Impact on stakeholders Effectiveness Efficiency 
Option 2.1. (baseline) n.a. n.a. n.a. 
Option 2.2. 
(obtain additional 
commitments) (+) regulators gain comfort that more 
contracts/ participants moved to CCP 
clearing. 
(-)higher costs in the form of initial 
margin, variation margin and 
contributions to default funds or any 
combination of the above (depending 
on the market participant) 
(+) capital relief for those market 
participants subject to capital 
requirements 
 (≈/?) possibility of expanded 
scope of clearing, though 
probably limited 
 (≈/+) costs at least 
offset by benefits 
 
Option 2.3. (provide additional 
regulatory 
incentives) (+) market participants more 
comfortable using CCPs 
(+) smaller participants more 
comfortable accessing CCP indirectly 
(-) CCPs may require higher margins, 
which makes them more costly for 
participants 
(-) direct CCP participants may charge 
higher fees to fund segregation (≈/?) More participants use 
CCPs but overall effect uncertain due to cost and 
voluntary use of CCP (≈/+) costs at least 
offset by benefits 
Option 2.4. 
(require CCP 
clearing of eligible 
derivatives) (+) regulators gain comfort that 
eligible contracts cleared on CCPs. 
(-) somewhat higher costs for dealers, 
but likely netting offsets 
(-) higher costs for non-financial 
institutions and potentially funds (+/++) significant increase in 
use of CCP due to mandate, 
hence significant reduction in 
counterparty risk (-) increased cost  
Option 2.5 
(require clearing for 
all derivatives) (++) all traded contracts are cleared 
by a CCP 
(-/--)market participants lose ability to 
use contracts that cannot be cleared by 
a CCP (++) significant  reduction in 
counterparty risk (-/--) increased cost,  
reduced ability to 
hedge risks by using 
customised contracts 
 
6.1.3.  Options for operational objective 3 (bilateral clearing) 
6.1.3.1.  Option 3.1. (rely on existing initiatives) 
Existing initiatives have already led to si gnificant improvements in the way bilateral 
clearing is done. Still, they suffer from the same shortcomi ngs as the other initiatives: 
(1) Limited personal scope.  While the parties that have currently committed to 
improve their internal collateral manage ment processes have made progress, 
further improvements at market level will  depend on other market participants 
doing the same. 
(2) Non-binding nature of the commitments.  Not honouring a voluntary 
commitment does not carry any particular sanction with it. Therefore, there is nothing that compels a market participan t to honour the commi tment in full or 
to prevent him or her from walking away from it at any point in time. 
 
EN 52   EN 6.1.3.2.  Option 3.2. (obtain additional commitments) 
This option would entail mostly broadeni ng the personal scope of the commitments. 
If other market participants signed up to the initiatives, this would improve both their 
processes and it would allow market par ticipants already bound by the commitments 
to improve their own performance. So if  the personal scope of the commitments 
could be broadened, the benefits of this op tion would be larger than those of option 
3.1. 
Improving bilateral clearing would entail a potentially large upfront  investment, with 
benefits of such investment only materi alising over time. In the case of smaller 
market participants that do not have su fficiently high transaction volumes, the 
benefits may not be sufficiently high to ju stify the adoption of sophisticated systems 
for collateral management. This would discourage them from adhering to the commitment. To a certain extent, the smalle r market participants could resort to 
using third-party service providers instea d of developing their own systems, thus 
potentially saving on the costs. Still, it is  highly unlikely that this option would 
completely eliminate shortcomings 1 (limited personal scope) and 2 (non-binding nature of the commitment). 
To the extent that some more stringent commitments would be required, this could 
potentially introduce some additional benefits , but also costs, compared to option 3.1. 
In any case, for any additional market partic ipants to adhere to  the commitment, the 
benefits would need to at  least offset the costs. 
6.1.3.3.  Option 3.3. (introduce specific targets) 
This option would eliminate shortcoming 2 (non-binding nature of the commitment) 
of option 3.1. and, depending on the scope of the legislation, potentially shortcoming 
2 (limited personal scope) as well. 
This option would probably lead to increased costs for those market participants that 
would not already be compliant with the re quirements set in the legislation. Since the 
legislation would just set out the targets th at would need to be achieved, but not the 
ways in which to achieve them, market part icipants would be free to choose the most 
cost effective solution to m eet the targets (e.g. in-house IT system, third-party service 
provider etc.). Compared to option 3.1., this option would lead to larger benefits as it 
would potentially cover all market participan ts that are involved in the collateral 
management process. 
6.1.3.4.  Option 3.4. (prescribe the methods) 
This option would lead to the same benefits as option 3.3. However, it is quite likely 
that these benefits would come at a highe r cost as prescribing how the processes 
should be organised would rob market particip ants of the flexibil ity that they would 
enjoy under option 3.3. For those market par ticipants that use processes that are 
significantly different from the prescribed one s, adaptation costs could be substantial. 
Table 6: Summary of the impact analys is for operational objective 3 (bilateral 
clearing) 
 Impact on stakeholders Effectiveness Efficiency 
 
EN 53   EN Option 3.1. (baseline) n.a. n.a. n.a. 
Option 3.2. 
(obtain additional 
commitments) (+) regulators gain comfort 
that risk management of 
non-CCP cleared contracts 
improved. 
(-) large upfront investment 
cost setting up procedures, particularly heavy for 
smaller market participants (≈/+) potentially broader 
personal scope and hence 
better risk management by a larger number of market participants (≈/+)  only market participants 
with positive net benefits would 
join 
 
Option 3.3. (set specific targets) (+/++) regulators gain 
comfort that risk management of non-CCP 
cleared contracts 
significantly improved. 
(-) large upfront investment 
cost setting up procedures, particularly heavy for 
smaller market participants (+/++) better risk 
management, broader scope,  
compulsory (≈/-) investment costs mitigated 
by freedom to choose way of 
meeting the targets 
Option 3.4. 
(prescribe the methods 
to be used) (+) regulators gain comfort 
that risk management of 
non-CCP cleared contracts significantly improved. 
(-) large upfront investment 
cost setting up procedures, 
particularly heavy for 
smaller market participants (+/++) better risk 
management, broader scope, 
compulsory (-/--) no flexibility on how to 
implement, potentially large 
costs for market participants 
with processes that differ 
significantly from prescribed 
ones 
 
6.1.4.  Options for operational obj ective 4 (standardisation) 
Standardisation is a prerequisite for achievi ng most, if not even all, of the operational 
objectives discussed in this report.135 The extent to which the other solutions 
examined in this report will be successful  will therefore depend on the level of 
standardisation that  will be achieved. 
6.1.4.1.  Option 4.1. (rely on existing initiatives) 
Existing initiatives have already led to si gnificant improvements in the levels of 
standardisation and therefore the mitigation of operational risk. Still, they suffer from 
the same shortcomings as the other initiatives: 
(1) Limited personal scope.  While the parties that have currently committed to 
adopt more standard legal contracts a nd more standard processes have made 
progress, further improvements at mark et level will depend on other market 
participants doing the same. 
(2) Non-binding nature of the commitments.  Not honouring a voluntary 
commitment does not carry any particular sanction with it. Therefore, there is nothing that compels a market participan t to honour the commi tment in full or 
to prevent him or her from walking away from it at any point in time. 
                                                
 
135 Standardisation is usually the driving force behind the adoption of central market infrastructure. As the 
case of CDS has shown the process of standardisation can be accelerated in order to facilitate the adoption 
of central market infrastructure. 
 
EN 54   EN 6.1.4.2.  Option 4.2. (obtain additional commitments) 
This option would entail mostly broade ning the personal scope of the existing 
industry commitments. If other market partic ipants signed up to the initiatives, this 
would improve the overall adoption of more st andard legal contracts and of standard 
processes. This would also increase the use of such cont racts and processes (e.g. if 
two parties want to enter into  a standard legal contract, both need to have adopted it 
first). So if the personal scope of the co mmitments could be broadened, the benefits 
of this option would be larg er than those of option 4.1. 
Switching to more standardised processes could entail a potentially large upfront 
investment, with benefits of such investme nt only materialising over time. In the case 
of smaller market participants that do not  have sufficiently high transaction volumes, 
the benefits may not be sufficiently high to justify this switch. Th is would discourage 
them from adhering to the commitment. To  a certain extent, the smaller market 
participants could resort to using third-party service prov iders instead of developing 
their own systems, thus potentially saving on the costs. Still, it is highly unlikely that 
this option would completely eliminate s hortcomings 1 (limited personal scope) and 
2 (non-binding nature of commitment). 
To the extent that some more stringent commitments would be required, this could 
potentially introduce some additional benefits , but also costs compared to option 4.1. 
6.1.4.3.  Option 4.3. (set specific targ ets for standardisation) 
This option would eliminate shortcoming 2 (non-binding nature of commitment) of 
option 4.1. and, depending on the scope of the legislation, potentially shortcoming 1 
(limited personal scope) as well . In the context of process standardisation, this would 
probably lead to increased costs for those ma rket participants that would not already 
be compliant with the requirements set in the legislation. Since the legislation would 
just set out the targets that would need to be achieved, but not the ways in which to achieve them, market particip ants would be free to choos e the most cost effective 
solution to meet the targets. 
As concerns contract standardisation, it could lead to the loss of some flexibility for 
certain market participants (those that requi re the flexibility of legal terms), however 
this would likely be at least mitigated, if not even offset by the benefits from such 
standardisation (e.g. easier adopt ion of automated processes). 
Overall, compared to option 4.1., this option wo uld lead to larger benefits as it would 
cover a larger group of market participants. Overall, the costs would also be larger, 
but not to such an extent that  they would exceed the benefits. 
6.1.4.4.  Option 4.4. (require the use of standa rd legal contracts and processes) 
As concerns process standardisation, this option would lead to th e same benefits as 
option 4.3. However, it is quite likely that th ese benefits would come at a higher cost 
as the more detailed requirements on how  the processes should be organised would 
rob market participants of the flexibility that they would enjoy under option 4.3. For 
those market participants that use processe s that are significantly different from the 
prescribed ones, adaptation costs could be substantial. 
 
EN 55   EN The full harmonisation of cont racts could potentially lead to higher benefits than 
option 4.3. To the extent that  the resulting contracts woul d differ substantially from 
existing ones, this would also entail an increase in costs compared to option 4.3. 
Table 7: Summary of the impact analysis for operational objectiv e 4 (standardisation) 
 Impact on stakeholders Effectiveness Efficiency 
Option 4.1. 
(baseline) n.a. n.a. n.a. 
Option 4.2. 
(obtain additional 
commitments) (≈/+) regulators gain comfort that 
standard contracts more widely 
used. 
(≈/+) easier use of automated 
processes 
(+) additional benefits for market 
participants already subject to the 
commitment 
(-) potentially large upfront 
investment cost, particularly heavy 
for smaller market participants (≈/+) potentially broader 
personal scope and hence 
broader use of standard 
contracts and processes (≈/+) only market 
participants with positive net 
benefits would join 
Option 4.3. 
(set specific targets 
for standardisation) (+/++) regulators gain comfort that 
standard contracts more widely 
used. 
(+) easier use of automated 
processes 
(-) potentially large upfront 
investment cost, particularly heavy 
for smaller market participants 
(-) loss of some fle xibility for market 
participants  (+/++) better risk 
management, broader 
scope,  compulsory (≈/-) investment costs 
mitigated by freedom to 
choose way of meeting the targets 
Option 4.4. 
(require use of 
standard 
contracts/processes) (+/++) regulators gain comfort that 
standard contracts more widely 
used. 
(+) easier use of automated 
processes 
(-) potentially large upfront 
investment cost, particularly heavy 
for smaller market participants 
(-) loss of some flexibility (+/++) better risk 
management, broader scope, compulsory (-/--) no flexibility on how to 
implement, potentially large costs for market participants 
with processes that differ 
significantly from prescribed ones 
 
6.2. The preferred policy options and instruments 
6.2.1.  The preferred policy options 
The preferred policy options are clearly marked in the tables summarising the 
impacts of the examined policy options. 
6.2.2.  The cumulative impacts of th e preferred policy options 
The policy options that have been chosen re quire that i) all the requested information 
on outstanding OTC derivatives contracts be re ported to trade repositories (or if that 
is not possible, directly to  supervisors), ii) aggregated  data on OTC derivatives be 
published for the benefit of the general public, iii) all contracts that meet pre-defined 
eligibility criteria be cleare d by a CCP; iv) that the collat eral management procedures 
for all OTC derivatives that remain clea red bilaterally be improved, and v) more 
standard contracts and processes be  adopted by market participants. 
Taken together, the above measures should facilitate the early detection of risks 
building up in the financial system, redu ce the counterparty credit risk related to 
 
EN 56   EN OTC derivatives, and improve the functi oning of the OTC derivatives market 
through the adoption of more efficient proce sses. Ultimately, the combined effect of 
the selected options should at least reduce th e severity of any future financial crisis, 
thus reducing its impact on the real economy. 
Given that the actions complement each other there is a concrete possibility that their 
combined benefits will actually exceed th e sum of the benefits of each separate 
measure. Similar synergies are likely to happen on the cost side of the measures. While it is true that most of the investme nts to support these meas ures will need to be 
borne in the short term, at  least some of those inve stments may cover several 
measures at the same time, thus reducing their overall cost impact. 
To the extent that the policy choices will he lp correct the mispricing of risk that 
occurred prior to the crisis (the price of risk was too low in relation to the level of risk in the system), they may (and probably w ill) lead to an increa se in the price of 
hedging and ultimately the cost of capital.  The exact magnitude of this increase is 
unknown (in part, it depends on the level of competitive pressure), but is not expected to be excessive. 
6.2.3.  The impact on retail investors and SMEs 
As a norm, retail investors do not have access to the OTC derivatives market. The 
policy choices made above will, therefore,  not have a direct impact on them. 
Similarly, the use of OTC derivatives am ong SMEs is relatively limited. To the 
extent that they use OTC derivatives, the expected exclusion of non-financial 
institutions from the scope of the pr oposals (see section 6.2.8.2. for more details) 
means that they will be spared the dire ct impacts. Both categories will, however, 
likely be subject to the indirect impact of th e proposals (i.e. the increase in the cost of 
hedging and of capital). 
6.2.4.  Social impact 
To the extent that the proposed policies w ill help contain the effects of future 
financial crises on the real economy, they w ill also help reduce the social costs of 
those crises (e.g. unemployment). 
6.2.5.  Environmental impact 
Nothing would suggest that the proposed po licy will have any direct impacts on 
environmental issues. There may, however, be  at least some indirect impacts. For 
example, since OTC commodity derivatives will be included in the scope of the 
proposals, there may be an impact on the prices of commodities  (e.g. oil, carbon 
emission allowances) and hence the environment. This impact is likely to be quite small, though. 
6.2.6.  Impact on third countries / im pact on EU competitiveness 
As described in section 3.3.4. several c ountries outside the EU are pursuing 
legislative initiatives in the area of OTC de rivatives, most importantly the US. With 
the caveat that EU legislation still needs to  be adopted by the EU legislators and that 
detailed technical rules still need to be  defined both in the US and in the EU, a 
comparison of the main elements of the Dodd-Frank Act with the preferred options 
 
EN 57   EN chosen above shows that they are broadly co nsistent. At this stage it is therefore 
possible to claim that there are no significan t risks of regulatory arbitrage between 
the EU and the US. Whether this will rema in the case after all the abovementioned 
processes will have been concluded, it is very difficult to predict. There is certainly a need to maintain a close di alogue with the US to prev ent that major divergences 
develop in the next phase of rulemaking. 
Since the OTC derivatives market is a globa l market, it is important to monitor not 
only the actions of the US, but also those of  other G20 members. Particular attention 
will also need to be given to  countries that are not part of the G20, as they are not 
bound by the Group's commitments and may therefore be tempted to attract OTC derivatives business to their jurisdiction. This could have a negative impact on the 
competitiveness of the EU (market participan ts may simply move their business to a 
jurisdiction that has e ither weaker rules or none at al l), although it is hard to judge 
what the magnitude of this impact could be . Furthermore, without having a clear idea 
of what third-country actions will entail  exactly, the means by which the EU could 
address this potential disadvantages are unknown. 
However, any potential loss of competitiveness or opportunities for regulatory 
arbitrage will have to be taken into ac count when deciding on the best way to 
implement the desired policy initiatives. In addition, interna tional commitments 
taken by the EU at the WTO will have to be considered to ensure that the implementation of the proposed policies is not incompatible w ith the EU's trade 
obligations. 
An important issue that still needs to be  addressed by all sides are OTC derivatives 
that have a cross-jurisdictional component. If no agreement at international level is 
found on how to treat these contr acts, there is a concrete risk  that they would be able 
to avoid regulation, at least partially (e .g. the CCP-clearing re quirement). Another 
point where close cooperati on will be needed concerns the recognitio n of market 
infrastructures (CCPs and trade repositories). This is due to the fact that EU market 
participants may want to use them for th e purpose of complying with the clearing 
and reporting obligations. 
The Commission will therefore need to de velop procedures for recognising third-
country market infrastructures that will wish to offer their services to entities located 
in the EU. In view of the recognition proce ss, the location of a particular CCP or 
trade repository in a third country should not pose any particular issues: EU entities 
should be able to use third-country ma rket infrastructures for the purpose of 
complying with the clearing or repor ting obligation only if those market 
infrastructures have been recognised to be subject to equivalent rules and supervision 
in their home country. 
6.2.7.  The preferred policy instrument 
Before starting the analysis of the various policy instruments, it is worth recalling 
that in its October 2009 Communication on derivativ es markets the Commission 
stated that a paradigm shift in the appro ach towards derivatives markets was needed, 
namely moving from "light-handed re gulation" to a more ambitious and 
 
EN 58   EN comprehensive regulatory polic y. This paradigm shift has been broadly welcomed by 
the Council136 and strongly supported by the European Parliament.137 
In view of the above, the Communication can  be immediately discarded from further 
analysis of the preferred policy option (it can also be discarded due to the fact that it 
has already been used in the initial st eps of the Commission's policy development 
process). 
The same can be said about the self-regulatory approach. As it was shown in section 
3 of this report, there ar e several industry in itiatives currently under way, many of 
which have already delivere d improvements in the way th e OTC derivatives market 
works. However, the approach cannot be used as the basic one for the reasons 
outlined in the analysis in section 6.1. Rath er, the existing initiatives can be used 
either as a starting point for legislative act ion (they provide useful information on the 
detailed measures that may be targeted ) or as a useful complement to it. 
An advantage of choosing a Recommendation is certainly the high flexibility that 
this instrument gives to Member States (t he latter may decide whether or not to do 
something, and in case of the former also what exactly to do). In other words, a 
Recommendation would simply provide the national policy makers  with a suggestion 
by the Commission to the policy preference with no effect on the situation that needs 
to be addressed. Member States' legislators would then be left to  decide whether to 
accept or not the policy suggestion. In cas e they would choose to accept it, they 
would then need to translate it into concrete mandatory rules within their jurisdictions. 
In the context of the problems and objectives  that were defined, this flexibility is 
actually a severe drawback. Indeed, as 
(1) the identified problems concern areas that are of critical importance for the 
smooth functioning of financial mark ets and therefore the economy as a 
whole, 
(2) the cross-border effects of diverg ing national rules addressing the OTC 
derivatives market constitute a severe draw back for the efforts to create a safe 
and efficient financial market, and 
(3) solving the identified problems requires a high level of harmonisation of rules 
(and thus legal certainty), 
a legally non-binding instrument, such as a Recommendation, turns out to be 
inadequate. It may lead to  a situation in which i) no action is taken by Member 
States, ii) action is undertaken  only by some of them (pot entially on different subsets 
of the issues), or iii) action is undert aken, but the Recommendation is not followed 
by all Member States that decided to act , leading to potentially contradicting 
solutions that could actually worsen th e situation. Due to the seriousness of the 
identified problems, neither outcome is acceptable. 
                                                
 
136  See point 5 of Council Conclusions of 2 December 2009. 
137  See Langen report. 
 
EN 59   EN This means that the basic policy choice - s hould action be consid ered necessary at 
EU level - for introducing these changes is  through a harmonising legal instrument at 
the EU level. For this there are two options, namely to use a Directive or a Regulation. 
While it is correct to say that the main type of legislative instruments introducing EU 
financial services legislation has traditionally  been Directives, this was the result of 
the contents and the objectives of thos e instruments. They mainly approximated 
national rules on the taking up of business and the provis ion of services and on a 
gradual manner. They also allowed the seamless integration of those rules in the legal systems of the Member States while giving the opportunity to them to extend 
the EU rules to areas uncovered by the EU legislation. Admittedly, a Directive is the 
most appropriate form of instru ment to achieve this result. 
However, in view of the obj ectives of the current proposal , a Directive does not seem 
to be the right choice of instrument. Th e proposal requires th at the legislative 
framework is applied throughout  the EU with ex actly the same scope, without any 
gold-plating and without allowing residual power s to national legislators. In fact, the 
three objectives, namely information on positions, the use of a CCP and 
standardisation would require absolute clarity and uniformity as to the personal and 
material scope of application, the conditi ons of its application throughout the EU 
without exceptions or diverging implem entations by nationa l authorities and 
jurisdictions.  
It is these characteristics of this legisla tive instrument that in a sense dictate the 
choice of Regulation as the most appropriate form, since:  
(1) directly applicable Regulations are th e only way to have effectively uniform 
rules throughout the EU, to the recognised  benefit of industry and the users of 
these rules. They eliminate divergences  in applicable law between Member 
States. At the same time, uniform rules do not mean "one size fits all" and are 
not incompatible with a certain degree of flexibility for national supervisors in the application of those rules. 
(2) Regulations reduce legal uncertainty: in case of directives national law 
provisions have to be interpreted in the light of the underlying directives, 
which themselves may require inte rpretation, whereas regulations are 
applicable without a second la yer of national legislation. 
(3) Regulations ensure that European law is applicable immediately and to its full 
extent in the whole Union after its a doption by the legislator. They avoid the 
resource-intensive and time-consuming tr ansposition of directives by Member 
States and the monitoring of timely  and correct transposition by the 
Commission.  
(4) The numerous infringement cases against Member States for late, non- or 
incorrect transposition of directives are evidence that the transposition of EU 
law is ineffective in many instan ces. Depending on the content of the 
regulations, adaptations of national legi slation may continue to be necessary 
in some cases. But this is much more  limited than the transposition of a 
 
EN 60   EN directive, and [in most ca ses$ application of a Regul ation in the markets will 
not depend upon it.  
(5) The transposition process has proven particularly inappropriate for quick 
responses needed in times of crisis  and to implement G20 commitments 
within the timeframes committed to  at the international level.  
(6) Regulations can be directly invoked by the parties concerned before national 
administrations and courts, whereas this applies only in very limited 
circumstances for Directives.  
For all these reasons, the Commission servic es consider that a Regulation is the 
preferred option.  
6.2.8.  The scope of legislation 
Various market participants have advanced  arguments for excluding them or certain 
types of OTC derivatives they use from  the scope of any potential legislation 
regulating the OTC derivatives market. The following two sections provide a more 
detailed analysis of the issues that were raised in this context and of the possible 
ways to tackle them. 
6.2.8.1.  Material scope 
In terms of the types of OTC derivatives that should not fall under the scope of the 
Commission's policy proposals, many market participants felt that the main problems 
were caused by CDS, so any future legi slation should only be focused on them. 
Especially for two market segments, namely foreign exchange and commodity derivatives, a large number of market pa rticipants felt that no regulatory action 
should be taken, because they played no role in the financial crisis. This argument is 
"problematic" in three ways. Firstly, it is not  entirely true: as ar gued in various parts 
of this report, the web of connections among the biggest market players created by 
all OTC derivatives played an important role in the crisis. Secondly, the argument 
ignores the fact that many of  the issues related to the f unctioning of the CDS market 
are equally valid in other segments of the OTC derivatives market. Finally, the 
argument is backward-looking: the proposed legislation should not just aim at fixing 
the most immediate problems that arose dur ing this crisis. It should also provide 
regulators with a comprehensive set of tool s to detect the build-up of risks in the 
system and thus prevent, or at least limit, the severity of future crises. 
The Commission already acknowledged, in its  second Communicati on on derivatives 
markets, that the various market segmen ts differed in their characteristics and 
indicated that, where justified, its polic y proposals would dul y take into account 
these specificities.
138 However, the Commission also expressed its belief that a 
comprehensive policy on derivatives was necessary in order to avoid market participants exploiting differences in rules, i.e. regulatory arbitrage.  
                                                
 
138 The Commission indicated that particular attention would be given to the specificities of certain 
commodity markets, e.g. electricity and gas markets, due to their particular underlying physical market 
structure. 
 
EN 61   EN Given that the main focus of the concer ns revolves around the a pplicability of the 
reporting and CCP clearing requirements it is wo rth to look at the two in more detail. 
As clearly stated in this report, the main  objective of the reporting requirement is to 
increase the transparency of the OTC deri vatives market, in pa rticular by providing 
comprehensive information on the positions held by the various market participants. Leaving entire segments of the OTC deri vatives market out of this requirement 
would mean that regulators could not ga in a comprehensive view of the entire 
market. This would defeat the purpose of the whole exercise. 
As concerns the CCP-clearing requirement , the Commission has repeatedly stated 
that it is aware of the fact  that not all OTC derivatives could be cleared by a CCP and 
that it has no intention of forcing market participants to clear all their trades on a CCP. The preferred policy option fully reflec ts this view: it requires that only those 
OTC derivatives that fulfil certai n criteria be cleared by a CCP. 
6.2.8.2.  Personal scope 
In terms of the market participants th at should not fall under the scope of the 
Commission's policy proposals, there was a unanimous plea from non-financial 
institutions to be excluded from any ki nd of future legislation on OTC derivatives.
139 
The main argument that they advanced in defence of this position was that their 
dealings in OTC derivatives do not represent a systemic risk. They also warned that 
if they would be subject to the legislati on, the resulting costs could force them to 
reduce, or in the extreme even abandon, their hedging practices. 
Similarly to its statement on the various market segments, the Commission also 
indicated that, where justified, the policy proposals would strike  the right balance 
between financial and non-financial instituti ons. In particular, the Commission stated 
that in order to promote competitiveness and growth of the European industry, it 
would strive to ensure that any futu re policy option would allow non-financial 
institutions to manage the risk s inherent to their business. 
The impact analysis shows that including non- financial institutions  in the scope of 
the policy proposals, especially the CCP-cl earing requirement, may expose them to a 
significant increase in their costs. In light  of this, two possible solutions can be 
contemplated. 
One is to leave non-financial institutions en tirely outside the scope of the proposals. 
This approach has two important drawbacks.  The first one is that it creates a loophole 
that other market participants may try to take advantage of. The second one is that it 
ignores the possibility that one or more non-financial institutions may already play, 
or will do so in the future, a significant (even systemically) role in a particular 
market segment. 
The other one is to leave non-financial ins titutions outside the scope of the proposals, 
including, at the same time, a safeguard that would allow the inclusion of a non-
financial institution in the scope of the legislation, should its positions exceed a pre-defined threshold. The possibility of setti ng multiple thresholds that would allow for 
                                                
 
139 Similar calls for exclusion have also come from supranational institutions (e.g. development banks) and 
governments. 
 
EN 62   EN the progressive inclusion could also be considered. The thresholds should be re-
calibrated periodically in order to reflect correctly the evolution of the market.140 
This solution is better as it would address both drawbacks of the first one. 
6.2.9.  Impacts of the detailed technical rules 
As already stated, the preferred policy optio ns represent only ge neral principles, In 
order to make them operational, detailed t echnical rules will need to be adopted by 
the Commission. In accordance to existing prac tice, the costs and benefits of those 
rules will be assessed at that time. 
*   *   * 
The policy choices made above put financial market infrastructure  at the very heart 
of the efforts to reform the OTC derivati ves market. The decision to require the use 
of CCPs and trade repositories will further increase the systemic importance of the former and will provide a systemic role to  the latter (to the extent they did not 
already have one). This imposes an obligation to ensure that this infrastructure is safe 
and sound, in order to prevent the situation in which its use woul d actually increase 
systemic risk instead of decreasing it. 
In order to achieve this goal, the outstand ing issues that have been identified in 
relation to the functioning of  CCPs and trade repositories need to be addressed. The 
issues and the ways of addressing them ar e discussed in the next section of this 
report. 
                                                
 
140 The information stored in trade repositories will play a crucial role in the initial definition and periodic 
calibration of the thresholds. 
 
EN 63   EN  
7. POST-TRADING MARKET INFRASTRUCTURE  
7.1. Central counterparties 
CCPs can clear both securities and derivative s, irrespective of whether they are 
traded on an exchange or an OTC market . In many cases the same CCP clears many 
different financial instruments and market s and while there are certain nuances and 
specificities that are related to each one of  them, the basic princi ples applicable to 
CCP clearing are universal. The analysis pres ented in this section in respect of this 
fact. 
7.1.1.  Background141 
Today, CCPs are used to clear both securities and derivatives trades. However, 
whereas some form of CCP has been presen t in the European derivatives space since 
the late 19th century, it took CCPs far longer, until late in the second half of the 20th 
century, to gain a firm foothold in the Eu ropean securities space. The reason behind 
this gap lies in the more prominent role  that counterparty credit risk plays in 
derivatives transactions compared to s ecurities transactions. Indeed, derivatives 
transactions take much longer to comple te (they can take decades to complete, 
whereas securities transacti ons typically take three days) and involve greater 
uncertainty as to the value (and even direc tion) of the ultimate transfer obligations. 
Hence, CCPs play a more prominent role for them. 
A CCP is defined as an entity that in terposes itself between counterparties to 
contracts traded in one or more financial markets, becoming the buyer to every seller 
and the seller to every buyer.142 Thus the “many-to-many” chain of credit is replaced 
by “one-to-many” arrangement, with the CCP at the centre of the arrangement (see Figure 12 below). 
Figure 12: Bilateral vs central (CCP) clearing 
C
FD B
A EC
FD B
A E
 C
FD B
A ECCPC
FD B
A ECCP
 
                                                 
141 This section is based on Bliss, Robert and Robe rt Steigerwald, Derivatives Clearing and Settlement: A 
Comparison of Central Counterparties and Alternative Structures," Economic Perspectives, 2006, 30 (4, 
Fourth Quarter, Federal Reserve Bank of Chicago), p.22-29. Available at 
http://www.chicagofed.org/digital_a ssets/publications/economic_perspectives/2006/ep_4qtr2006_part2_bli
ss_steigerwald.pdf. 
142  Bank for International Settlements, Committee on Payment and Settlement Systems, and Technical 
Committee of the International Organization of Securities Commissions, 2004, Recommendations for 
Central Counterparties, Basel, Switzerland, November. http://www.bis.org/publ/cpss64.pdf. 
 
EN 64   EN The legal process whereby the CCP is inte rposed between buyer and seller is known 
as novation.143 To put it simply, novation is the replacement of one contract with 
another. In fact, when a CCP steps in betw een the original partie s to the trade, two 
novations takes place, leading to the crea tion of two new, perfectly offsetting 
contracts. Because the two contracts offset one another, the CCP normally144 bears 
no market risk (the latter is still borne by the original parties to the trade). However, 
as counterparty to every position, the CCP bears credit risk in the event that one of its 
counterparties fails. Similarly, the CCP’s count erparties bear the credit risk that the 
CCP might fail. 
CCPs mitigate their counterparty credit  risk exposure through a number of 
reinforcing mechanisms, typically includi ng access restrictions, risk-management 
tools (such as collateralisation), and lo ss mutualisation. These mechanisms are 
jointly known as the “risk (def ault) waterfall” of the CCP. 
• Access restrictions (such as membership requirements) are a CCP’s first line of 
defence. CCPs only deal with partie s that meet their standards for 
creditworthiness and operational capability  and may revoke access privileges for 
those who fail to maintain these standards and meet other obligations to the CCPs. 
This permits the CCPs to limit their risk e xposure to those partie s they are able to 
monitor. 
• The second line of defence is represente d by the CCP’s counterparty credit-risk-
management techniques. A CCP usually uses several of them. For example, 
positions and payment requirements are multilaterally netted. CCPs also typically impose collateral requirements (i.e. initia l margin) on market participants that 
have direct access to the CCP. In addition,  gains and losses due to mark-to-market 
fluctuations in the open positions are posted to a clearing member’s margin 
account on a regular (usually daily) basis a nd result in calls for variation margin. 
• If the posted initial margin is not suffici ent to offset a loss resulting from the 
failure of a clearing member, the thir d line of defence is activated. After 
exhausting the failed clearing member’s in itial margin, a CCP w ill use the latter’s 
contribution to the default fund to cover any residual losses. If this were to prove insufficient, the CCP can then proceed to  share any remaining loss among all (or 
certain classes of) clearing members by using their default fund contributions. 
• The fourth, and last, line of a CCP’s defence is its own capital.
145 
                                                 
143  In some European countries, an alternative approach , known as open offer, is used. In this case, the CCP 
makes an offer to enter into pairs of contracts on terms agreed upon by two markets participants, under 
certain rules. The market participants agree upon the terms but never formally enter into a contract vis-à-
vis each other. Instead, they report  their agreement to the CCP, which then enters into the two contracts. 
144  In case of a counterparty’s default, the CCP’s position would become unbalanced and the CCP would be 
exposed to market risk until the defaulting counterparty’s position would be reversed. 
145  Depending on each individual CCP’s arrangements, the use of at least part of the CCP’s own capital can 
come before the other defences have been depleted, for example before the default fund contributions of 
the non-defaulting clearing members are tapped. This serves as an incentiv e for the CCP to perform its risk 
management tasks properly. Some CCPs may also have  additional defences in place, such as additional 
calls for contributions from non-defaulted clearing members, which may be used before the CCP’s capital 
is tapped. 
 
EN 65   EN By virtue of the risk-mitigation role they  play, CCPs are a critical component of the 
market they serve. Consequently, their fa ilure becomes a potential systemic event. 
Indeed, should a CCP fail, the most imme diate consequence would be at least a 
temporary breakdown of the market as th e whole structure through which positions 
are established, maintained, and closed-out would be disrupted. The effects of such a 
CCP failure, were it to occur, might be extremely serious. 
In view of their systemically  important role, CCPs are subj ect to strict regulation. In 
the EU, CCPs are regulated at  the national level. Since the rules in each Member 
State have been shaped by the specific economic and institutional circumstances, different Member States have adopted di fferent solutions when regulating CCPs. 
This has led to a very diverse and fragmented CCP landscape in the EU.
146 The 
diversity is reflected in the different forms (e.g. a bank, a commercial entity) and in 
the different business models (vertically in tegrated with exchanges or stand-alone) 
that CCPs have adopted. The fragmentation is  a function of the number of CCPs that 
exist in the EU. 
The above differences make cross-border pr ovision of CCP services more costly and 
potentially less safe than woul d be desirable and represent a barrier to the integration 
of the EU financial market. The Comm ission highlighted this issue in two 
Communications, published respectively in 2002 and 2004.147 The 2004 
Communication concluded that le gislation was necessary to ensure efficient and safe 
pan-European clearing and settlement. 
In July 2006, after having considered the advantages  and disadvantages of a 
legislative solution, the Comm ission decided not to propos e any new legislation in 
the area of post trading in ge neral and CCPs in particular. Instead, it opted for a two 
pronged approach. In order to increase effi ciency and integration in the market for 
post-trading services, it called on the industr y to provide a self regulatory solution. In 
November 2006 the industry responded by adopting a Code of Conduct on Clearing 
and Settlement148 that addressed three main issues: transparency of prices and 
services, access and inter operability, and unbundling of  services and accounting 
separation. Its scope is limited to cash equiti es. To monitor the implementation of the 
commitment, the Commission created the Monitoring Group of the Code of Conduct (MOG).
149 The Commission services also prepar ed regular reports to inform the 
Council about the progress made in implementing the Code of Conduct.150 
In order to ensure more consistent re gulation across the EU the Commission called 
upon CESR and ESCB to complete their wo rk on recommendations for securities 
settlement systems (SSSs) and CCPs. In  June 2009 the ESCB and CESR published 
their recommendations for SSSs and CCPs,151 an adaptation of the global CPSS-
                                                 
146  See Annex 4 for an overview of existing CCPs. 
147  Clearing and Settlement in the European Union: Main policy issues and future challenges - COM(2002) 
257 and Clearing and Settlement in the European Un ion - The way forward - COM(2004) 312. Available 
at http://ec.europa.eu/internal_market/financial-markets/clearing/communication_en.htm#com. 
148  A copy of the text of the Code of Conduct and of other related documents is available at 
http://ec.europa.eu/internal_market/financial-markets/clearing/communication_en.htm#code. 
149  See MOG website at http://ec.europa.eu/intern al_market/financial-marke ts/clearing/mog_en.htm. 
150  Available at http://ec.europa.eu/internal_market/financial-markets/clearing/communication_en.htm#ecofin. 
151  Available at http://www.ecb.europa.eu/pub/pdf/other/pr090623_escb-cesr_recommendationsen.pdf 
 
EN 66   EN IOSCO recommendations, with the aim to increase the safety, soundness and 
efficiency of CCPs in the EU. The recomm endations are addresse d to regulators and 
overseers, who have committed to using them as a regulatory tool and to strive to 
achieve their consistent implementation a nd a level playing field for SSSs and CCPs 
in the European Union. The CCP recommendations cover all aspects of a CCP’s activities, including risk management, governance and links. They also take into 
account the specific risks related to central clearing of OTC derivatives. 
7.1.2.  The political mandate 
As concerns OTC derivatives, in the October 2009 Communicat ion on derivatives 
markets the Commission announced that it intended to propose legislation governing 
their activities so as to e liminate any discrepancies am ong national legislations and 
ensure safety, soundness  and proper governance. 
In the area of securities, the November  2009 Commission services report to the 
Council concludes that the Code of Conduc t has reached its objective of enhancing 
efficiency by increasing competition. It furthermore points out that the Code of Conduct helped reveal additional problems - es pecially regulatory ones - that need to 
be properly addressed. Finally, it concludes that in order to resolve issues related to 
risk and differences in regulation can only be addressed by legislation. 
In its Conclusions of 2 December 2009, the Council agreed with the need to promote 
CCP clearing of eligible derivatives, welcomed the Commission's intention to work on legislative proposals for CCPs and agreed that further steps need to be taken to 
address issues related to risk and regul atory barriers to CCP clearing of cash 
equities.
152 
In its Resolution, the European Parliament  welcomed the Commi ssion’s intention to 
submit legislative proposals on clearing houses CCPs.153 
7.1.3.  The problems 
7.1.3.1.  Problem 1: Lack of level playing field for CCPs 
Given the lack of common rules, a CCP wish ing to offer its services outside its home 
market may need to obtain multiple authorisations and may have to comply with multiple sets of rules. For example, in some Member States a CCP is required to 
have a banking license in order to be authorised. A CCP coming from a Member 
State not having this requirement, would therefore risk being subject to double 
regulation. In the best of cases , this leads to an increase  in the operational costs for 
CCPs providing their services in several Me mber States and consequently increases 
the costs for market participants using them. In the worst of cases, it discourages a CCP from even attempting to enter another market, as the associated costs would be 
simply too high. In short, the lack of comm on rules can act as an additional barrier to 
entry in a market, providing an additional layer of protection to  the incumbent CCP. 
More in general, it prevents the integrat ion of the post-trading sector in the EU. 
                                                
 
152  See Annex 3. 
153  See Langen report, paragraph 44. 
 
EN 67   EN The practical difficulties stemming from th e lack of common rules for CCPs have 
been highlighted both in th e area of cash equities (mor e specifically in connection 
with the establishment of links between CCP s) and in the area of OTC derivatives 
(more specifically the CDS market). 
7.1.3.2.  Problem 2: Lack of common rules for th e establishment and treatment of links 
The establishment of links is considered to be a way to increase competition among 
CCPs. It is therefore no surprise that when the Code of Conduct, and in particular the 
Guideline on access and interoperability, wa s established, there was a flurry of 
interoperability requests between CCPs. Th e CCPs wanted to take advantage of the 
opportunity presented to them by links and enter new markets. However of all the 
interoperability request that had been made , only one came to fruition so far. The rest 
of the requests have been either abandone d or are still in the process of being 
completed. Setting aside those requests that may have been more the result of strategic positioning than anything else, the slow progress of the majority of the requests can be mainly attributed to  three groups of obstacles: regulatory, 
commercial and technical/operational. 
The regulatory obstacles are mainly linked with the differences in national rules 
highlighted in problem 1 above. Indee d, a mapping exercise concluded by CESR
154 
highlights that national regulatory arra ngements differ in how link requests are 
regulated, what the conditions are for cro ss-border service provi sion, the authorities 
involved, the supervisory pow ers and how cross-border c oordination is ensured. As 
requests between CCPs started taking off, re gulators have started to grapple with the 
impact that interoperability involving multiple CCPs may have on liquidity, credit 
and systemic risk.155 In particular, regulators raised  concerns on the way CCPs chose 
to collateralise the exposures they would ha ve with one another. In this context the 
lack of common rules does not help, as it ma kes it more difficult to reach a common 
position on how to address the risk concerns. While the concerns that regulators have 
in relation to interoperability in cash equiti es markets are significant, they are not as 
strong as those related to the concerns th ey have on interoperability in the OTC 
derivatives market. 
The commercial obstacles are the direct consequence of the lack of incentives for 
incumbent CCPs to accept interoperability requests. By definition, an incumbent CCP that enjoys a dominant position can only lose by opening up its market to competition. Consequently, the incumbent will  have no interest in agreeing to enter 
in an interoperability agreement. This is  why the Code of Conduct explicitly states 
that loss of market share cannot be used as an argument to turn down a request. However, an incumbent can always find away of slowing down the process without being in breach of the letter of the Code of Conduct. In this situation,  the trading 
venues have proved to play a cr ucial role as facilitators of  interoperability. Indeed, in 
instances where the trading venues themselves showed a clear will for interoperability, the process tended to be mu ch faster then in those where this was 
not the case. 
                                                
 
154  CESR (2009). Preliminary technical advice on access & interoperability arrangements in the EU, 
CESR/08-870. 
155  See Joint Regulatory Authorities of LCH.Clearnet Group, Investigation of risks arising from the 
emergence of multi-cleared tr ading platforms, July 2008. 
 
EN 68   EN The technical/operational obstacles are due to differences in business models, market 
standards, practices and technical communication la nguages between CCPs. For 
example, a very important question in an interoperability agreement concerns the 
treatment of exposures be tween the two inte roperating CCPs. Given that CCPs 
usually adopt different risk management models, finding an agreement on how these 
exposures will be handled can be difficult, as each CCP will have a clear preference 
for an approach that mimics its existing solutions.  
The lower number of links due to the existe nce of these obstacles means that there is 
less competition, less choice for investors, a nd also less chances for integration and 
consolidation in the sector. 
7.1.3.3.  Problem 3: Danger of competition on risk 
The Code of Conduct is not the only source of competition in the CCP space: there is 
also the MiFID. The competition between mu ltilateral trading facilities (MTFs) and 
regulated markets (i.e. exchanges) th at was spurred by the MiFID has had a 
somewhat surprising side effect: indire ct competition between CCPs. To put it 
simply, in order to compete against estab lished exchanges, MTFs chose to use newly 
established CCPs that offered much lower f ees than the incumbent CCPs. This made 
the overall price proposition of the MTFs much more attractive than those of the 
exchanges and allowed them to capture an important market share. In response to 
this new competition, exchanges started cutting their fees and started demanding their post-trading infrastructure (therefore also CCPs) to do the same. This has led to 
an unprecedented drop in clearing fees on the market. 
This has prompted questions as to whethe r the fees charged by CCPs will soon reach 
the physiological floor dictated  by the economies of scale. Th is in turn gave rise to 
concerns about the possibility  of CCPs starting to compet e on risk (this is to be 
understood as competition through lowering th e quality of risk management, more 
specifically by cutting the margins required from the clearing members). A number 
of market participants seem  to fear that this is already happening. They have 
privately told the Commission services on various occasions th at CCPs had started 
lowering their risk standards in order to lo wer their costs and attract more clients. 
Recently, a CCP voiced the same concern in public.
156 These claims were never 
backed with concrete evidence, so the Commission services cannot judge whether 
they are true or not. Irrespective of whether they are true or not, however, they highlight a potentially dangerous side effect of competition between CCPs. 
Unlike competition between CCPs based on, for example, technological innovation, 
the race-to-the-bottom kind of  competition that is comp etition on risk is highly 
undesirable, as it can have devastating consequences given the systemic role of CCPs. 
                                                
 
156  LCH.Clearnet warns of loose standards , Financial Times, 16 April 2010. 
 
EN 69   EN 7.1.3.4.  Problem 4: Impaired portability of positions and associated margins (collateral) in 
the CCP environment 
One of the consequences of introducing a cl earing requirement is that those market 
participants that would not meet the crite ria to become clearing members of a CCP 
would have to access it i ndirectly, through a general cl earing member (GCM). This 
raises the question of what these indirect participants could do in case of the GCM’s default. In principle, they would have two basic choices in such a situation. The first one would be to close their positions w ith the defaulting clearing member and 
seeking to replace the closed contract with  a new one. In this ca se, they would bear 
the market risk. The second one would be to move their positions and the associated collateral to another GCM w ithin the same CCP (assuming that they had found one 
that would be willing to accept this). In th is case, no market risk would be involved. 
Irrespective of the choice they would make , the question of whether they would be 
able to get back the collateral (more preci sely the initial margin) they have posted 
with the failed GCM would arise.
157 In the first case, the answer would depend on the 
manner in which the initial margin had been  provided and held, and particularly, the 
extent to which margin had been segregat ed from the GCM’s assets and recoverable 
by the clients. In the second case the answer would additionally depend on the 
effectiveness of the CCP’s procedures for th e transfer of client positions and related 
initial margin. In both cases the answer would depend on the law applicable to the 
defaulting GCM. 
The question is not just theoretical, as c lients of Lehman Brothers International 
Europe (LBIE) found out after the latter de faulted. When these clients attempted at 
transferring their posi tions and related initial margin from LBIE to another GCM 
within the same CCP, they discovered they  could do the former, but not the latter 
(because the margin of LBIE’s clients was frozen). To make matters worse, the clients were required to deposit margin  with their new GCM to meet margin 
requirements associated with the transfe rred positions, resulting in “double margin”. 
The origin of the problem was two-fold: firs t, in some cases the assets of LBIE and 
those of its clients were co-mingled in the same account. In other words, it was not 
immediately evident which assets belonged to whom. Second, the margin was often 
transferred to LBIE with hypothecation rights,  i.e. LBIE was allowed to lend out the 
assets it received from its clients to a third party. 
7.1.3.5.  Problem tree 
Figure 13 below provides an overview of the various problems , their drivers and 
their consequences. 
                                                
 
157  In fact there are two questions: the first one concer ns the ability to get the initial margin back, while the 
second one concerns the timing of this happening. In times of market turmoil the second question may be 
considered as important as the first one. 
 
EN 70   EN Inefficient and 
potentially unsafe 
post-trading 
infrastructureDifferent rules on 
risk management 
for CCPs
Obstacles to cross-
border provision of 
CCP services
Obstacles to the 
establishment of 
links between CCPs
Inadequate 
segregation of 
margins at CCP 
levelDrivers Problems Consequences
Compromised 
investor protectionLack of level playing 
field for CCPs
Lack of common 
rules for the 
establishment and 
treatment of links
Danger of 
competition on risk
Impaired portability 
of client positions 
and associated 
marginsInefficient and 
potentially unsafe 
post-trading 
infrastructureDifferent rules on 
risk management 
for CCPs
Obstacles to cross-
border provision of 
CCP services
Obstacles to the 
establishment of 
links between CCPs
Inadequate 
segregation of 
margins at CCP 
levelDrivers Problems Consequences
Compromised 
investor protectionLack of level playing 
field for CCPs
Lack of common 
rules for the 
establishment and 
treatment of links
Danger of 
competition on risk
Impaired portability 
of client positions 
and associated 
margins 
7.1.3.6.  How would problems evolve  without EU action? 
Problem 1  
In the absence of any EU action, the only available framework for facilitating the 
cross-border provision of CCP services  would be the one provided by the ESCB-
CESR recommendations. It is still unclear to  what extent these recommendations can 
contribute to resolving this pr oblem, as too little time ha s passed since their adoption. 
Nevertheless, there are at leas t some elements that may lead one to believe that they 
will not be able to eliminate the problem  in its entirety. First, the ESCB-CESR 
recommendations are based on CPSS -IOSCO recommendations which were 
published already in November 2004. Although the latter were adopted by regulators 
in the EU, they failed to make any significant contributions towards solving this problem. Second, they are a set of high-level principles that can be interpreted and 
implemented in different ways. Last, and most important, they are non-binding and 
are thus automatically superseded by a ny binding rules set at national level. 
Problem 2
 
Similarly to problem 1, in the absence of EU action, the establis hment of links will 
depend on existing national rules, and any existing standards and recommendations, 
as well as on cooperation between competen t national authorities. At EU level, the 
common framework could yet agai n be provided by the ESCB-CESR 
recommendations (in particul ar recommendation 11). Howe ver, as in the case of 
problem 1, there are limits to what  the recommendations can achieve. 
On the industry side, the C ode of Conduct would continue  to provide the blueprint 
for the process of establishing links be tween CCPs in the cash equity space. 
Furthermore, the industry is also trying to d eal with the issue of risk management of 
links. For example, the European Associa tion of CCP Clearing Houses (EACH) has 
produced a set of standards for the risk management of links in July 2008.158 
                                                 
158  http://www.eachorg.eu/each/code-o f-conduct-risk-mgmt-0807.pdf. 
 
EN 71   EN However, similar to the ESCB-CESR r ecommendations, these standards too have 
their limits. While CCPs agree on the substanc e of the standards, they currently do 
not agree on how they should be implemented in practice, as each CCP believes its approach to risk management to be the best one. Another weakness of these 
standards is that, in principle, they deal only with interoperabil ity between two CCPs. 
A more recent initiative, led by EuroCCP,
159 is focused on interoperability among 
multiple CCPs. For the time being it is difficu lt to judge whether this initiative will 
bear any fruit. 
Problem 3  
The same analysis as the one provided for problem 1 applies. One additional point 
that needs to be made on this problem concerns recent developments in the post-trading market. In recent months, NYSE.Eu ronext has announced that it intends to 
move its clearing in-house and the London St ock Exchange has launched a review of 
its clearing arrangements that could lead to  the same outcome. While the main driver 
behind these decisions app ears to be dissatisfaction with existing clearing 
arrangements used by the two, the practical  consequence is a rather strong shift 
towards the vertical silo m odel in the EU. This shift is likely to further reduce the 
effectiveness of the Code of Conduct. 
Problem 4
 
The industry initiatives men tioned in section 3 include  also commitments on buy-
side access to CCP clearing w ith segregation of initial margin and portability. For 
CDS, the OSC has committed to work togeth er with CCPs in order to deliver these 
results by mid-December 2009. A commitment to resolve impediments to broader buy-side access has also been provided for in terest rate derivatives. The commitment 
have already led to concrete results: CCP s actively clearing CDS and interest rate 
derivatives are already offeri ng buy-side institutions the pos sibility of direct access 
and of initial margin segregation. The industry has also prepared a report on 
segregation and portability of custom er CDS positions and related margin.
160 
At least one Member State (the UK) is also looking at  the issues related to 
segregation and portability. 
7.1.4.  The policy objectives 
The general objectives are to increase th e safety and efficiency of the EU post-
trading infrastructure and to increase i nvestor protection. R eaching this general 
objective requires the realisa tion of the following more  specific policy objectives: 
(1) establish a level playing field fo r the provision of CCP services; 
(2) facilitate the establishment of links between CCPs; 
(3) increase the safety of CCPs; and 
                                                 
159  http://www.euroccp.co.uk/docs/leader ship/EuroCCP_InteroperatingCCPs.pdf 
160  http://www.newyorkfed.org/newsev ents/news/markets/2009/an090713.html 
 
EN 72   EN (4) provide additional safeguards for market participants accessing CCPs 
indirectly. 
In turn, the specific objectives  listed above require the at tainment of the following 
operational objectives: 
(1) remove obstacles to cross-borde r provision of CCP services; 
(2) remove obstacles to the estab lishment of links between CCPs;161 
(3) prevent CCPs from competing on risk; 
(4) facilitate the portability of client  positions and associated margins. 
An overview of the various objectives and th eir interrelations is depicted in Figure 14 
below. 
Figure 14: The objectives and their interrelation 
Increase the safety 
and efficiency of 
post-trading 
infrastructureRemove obstacles 
to cross-border 
provision of CCP 
services
Prevent CCPs from 
competing on risk
Facilitate the 
portability of client 
positions and 
associated marginsGeneral 
objectivesSpecific 
objectivesOperational
objectives
Increase investor 
protectionEstablish a level 
playing field for the 
provision of CCP 
services
Facilitate the 
establishment of 
links between CCPs
Increase the safety 
of CCPs
Provide additional 
safeguards for 
market participants 
accessing CCPs
indirectlyIncrease the safety 
and efficiency of 
post-trading 
infrastructureRemove obstacles 
to cross-border 
provision of CCP 
services
Remove obstacles 
to establishment of 
links between CCPs
Prevent CCPs from 
competing on risk
Facilitate the 
portability of client 
positions and 
associated marginsGeneral 
objectivesSpecific 
objectivesOperational
objectives
Increase investor 
protectionEstablish a level 
playing field for the 
provision of CCP 
services
Facilitate the 
establishment of 
links between CCPs
Increase the safety 
of CCPs
Provide additional 
safeguards for 
market participants 
accessing CCPs
indirectlyIncrease the safety 
and efficiency of 
post-trading 
infrastructureRemove obstacles 
to cross-border 
provision of CCP 
services
Prevent CCPs from 
competing on risk
Facilitate the 
portability of client 
positions and 
associated marginsGeneral 
objectivesSpecific 
objectivesOperational
objectives
Increase investor 
protectionEstablish a level 
playing field for the 
provision of CCP 
services
Facilitate the 
establishment of 
links between CCPs
Increase the safety 
of CCPs
Provide additional 
safeguards for 
market participants 
accessing CCPs
indirectlyIncrease the safety 
and efficiency of 
post-trading 
infrastructureRemove obstacles 
to cross-border 
provision of CCP 
services
Remove obstacles 
to establishment of 
links between CCPs
Prevent CCPs from 
competing on risk
Facilitate the 
portability of client 
positions and 
associated marginsGeneral 
objectivesSpecific 
objectivesOperational
objectives
Increase investor 
protectionEstablish a level 
playing field for the 
provision of CCP 
services
Facilitate the 
establishment of 
links between CCPs
Increase the safety 
of CCPs
Provide additional 
safeguards for 
market participants 
accessing CCPs
indirectly 
7.1.5.  The policy options and policy instruments 
Before defining the policy options, it is impor tant to point out that these will set out 
broad principles rather than detailed measures. The more detailed measures will need to be defined at a later stage, most likely through Commissi on delegated and/or 
implementing acts. Their impacts will be analysed in accordance to established rules. 
                                                
 
161  Operational objectives 1 and 2 are not substitutes, but rather complements. The first objective simply 
means that a CCP wishing to offer its services to mark et participants in another Member States should be 
able to do so without the need to seek additional authorisations. However, for that CCP to be able to 
effectively offer its services in th at Member State, it will also need  access to local infrastructure (the 
trading venue, the central securities depository and potentially the incumbent CCP). 
 
EN 73   EN 7.1.5.1.  Policy options for operational objective 1 (c ross-border provision of CCP services) 
The basic policy options for th is objective are the following: 
• Option 1.1.:  Rely on ESCB-CESR recommendations for CCPs and 
cooperation among regulators (baseline scenario) 
• Option 1.2.:  Introduce a passport for CCP services 
An important question that needs to be addr essed in the context of a passport is the 
distribution of supervisory responsibili ties between the various national (and 
potentially European) authorities that have a direct interest in the safe and efficient 
operations of a CCP. The basic policy options  addressing this topi c are the following: 
• Option 1.3.:  National authorisation and supe rvision (baseline scenario). 
• Option 1.4.:  National authorisation and superv ision, with a strengthened role 
for the college of supervisors. 
• Option 1.5.:  EU authorisation performed by ESMA combined with national 
supervision 
• Option 1.6.:  EU authorisation and supe rvision performed by ESMA. 
In all four scenarios over sight of CCPs would continue  to be performed by the 
relevant central banks. 
7.1.5.2.  Policy options for operational objective 2 (links) 
The basic policy options for th is objective are the following: 
• Option 2.1. : Rely on Code of Conduct, ESCB-CESR recommendations and 
cooperation between authorit ies (baseline scenario) 
• Option 2.2.:  Introduce a right for CCPs to establ ish links provided that certain 
conditions are met. This option woul d set up detailed rules that links 
established between CCPs would need to respect in order to be approved and 
set the supervisory approval procedures  that would need to be followed. 
Apart from risk considerations, the ri ght of CCPs to become interoperable 
would be subject to additional conditi ons (e.g. proof of de mand for the link 
from users, prior assessment by compet ent authority that level of existing 
competition insufficient). 
• Option 2.3.:  Introduce a right for CCPs to establish links provided that all 
relevant risks are addressed and co mpetent authorities approve the link. 
7.1.5.3.  Policy options for operational objectiv e 3 (preventing competition on risk) 
The basic policy options for th is objective are the following: 
• Option 3.1.:  Rely on ESCB-CESR recommendations for CCPs (baseline 
scenario) 
 
EN 74   EN • Option 3.2.:  Introduce common risk standard s for CCPs. This option would 
spell out the principles that CCPs would need to follow when setting up their 
risk management processes. In add ition it would include specific targets 
concerning the overall financial res ources that CCPs should hold, without 
specifying in what form they should be held (default  fund, capital or 
something else). 
• Option 3.3.:  Harmonise the risk models of CCPs. This option would entail 
prescribing in detail how a CCP’s  defences should be structured. 
7.1.5.4.  Policy options for operational objective 4 (portability) 
The basic policy options for th is objective are the following: 
• Option 4.1.:  Rely on existing national rules and industry initiatives (baseline 
scenario). 
• Option 4.2.:  Require CCPs to offer indirect participants the possibility of 
having their margins placed in segregated (omnibus or nominee) accounts; 
leave indirect participants the choice of  whether or not to take advantage of 
the offer. 
• Option 4.3.:  Require CCPs to provide se gregated nominee accounts to 
indirect participants and require the latter to instruct their general clearing 
members to place their margins in those accounts. 
7.1.5.5.  Policy instruments 
The same analysis applies as th e one provided for in sections 5.2. 
7.1.6.  Analysis of impacts and choice of preferred policy option(s) 
7.1.6.1.  Options for operational objective 1 (cro ss-border provision of CCP services) 
Option 1.1. (rely on ESCB-CESR recommendations)  
The analysis for this option is already provided in section 7.1.3.6. 
Option 1.2. (introduce a passport)  
Under this option, a CCP that would be compliant with the regulatory requirements 
in its home market could gain access to th e market in other Member States without 
the need to undergo additional authorisations or having to comply with additional 
requirements. In other words, the passpor t would give CCPs the freedom to provide 
their services across the EU.162 This is because the passport regime is based on a 
harmonisation of the regulatory rules in the Member States. 
                                                 
162  The passport only refers to the free provision of se rvices because there is no apparent need to provide 
CCPs with the possibility to establish branches in Member States other than the one where they are 
established. A CCP can already serve markets and market  participants located in different Member States 
without the need for them to establish a physical  presence in every one of those Member States. 
 
EN 75   EN Compared to option 1.1., this option would si gnificantly lower the costs of entering a 
market in another Member State and would th erefore probably lead to an increase in 
competition in the CCP space. This would in turn increase the choice for investors, 
Table 8: Summary of the impact analysis  for operational objective 1 (cross-border 
provision of CCP services) 
 Impact on stakeholders Effectiveness Efficiency 
Option 1.1. (baseline) n.a. n.a. n.a. 
Option 1.2. 
(common authorisation 
process) (+) increased ability of 
CCPs to provide services 
across border 
(+) increased choice for 
investors (+) increased competition (+) lower costs of CCP-
clearing 
 
Option 1.3. (national author isation and supervision)  
This approach to authorisation and superv ision is common in financial services. The 
passport would allow CCPs to offer servi ces in each Member State without prior 
scrutiny of competent authorities other than those in the Member State of 
establishment. National competent authori ties would establish co lleges, which would 
include the competent supervisors of the CCP and, depending on whether the CCP 
served and exchange or the OTC market, the supervisors of the exchange or the 
supervisors of the CCP’s users. Disputes  between national authorities could be 
resolved within the structures of  the EU supervisory authorities. 
This option is a direct embodiment of the ar gument that since fisc al responsibility in 
case of the failure of a CCP lies within that CCP’s home Member State, supervision should also be located there. This argument is  certainly true in th e national context. 
However, in a cross-border context, wh ere a CCP may have members coming from 
multiple Member States, this argument may no longer hold. Indeed, in such a 
situation other Member States may need to use their fiscal resources were a CCP to 
fail, for example to provide support to thei r own banks that are members of the failed 
CCP. This problem will be particularly acu te in the context of the CCP-clearing 
requirement for OTC derivatives: given th at there are only a handful of CCPs 
clearing these instruments, most market pa rticipants will have to access a CCP not 
located in thei r jurisdiction. 
Option 1.4. (national authorisa tion and supervision, with a strengthened role for the 
college)  
This option leaves the res ponsibility of superv ision and authorisation of CCPs to 
national competent aut horities. However, it recognise s the need for other Member 
States' authorities and ESMA to take a strong er role in the authorisation process. In 
particular, this solution foresees that the national competent authority would ultimately decide on granting the auth orisation, but would need to obtain a 
favourable opinion of the college before  the authorisation could take effect. 
This solution recognises that, on the one  hand, the activities  of a CCP are by 
definition cross-border and that competent authorities other than the home authority 
may have an interest in a CCP's proper  functioning. On the other hand, it recognises 
the need to align supervisor y and fiscal responsibility. 
 
EN 76   EN Option 1.5. (EU authorisati on, national supervision)  
In view of the issues high lighted under option 1.3., this option contemplates a split 
between authorisation and day-to-day supervis ion. In particular, it gives the former to 
ESMA while leaving the latter with the nati onal competent authority. In practice, this 
option would ensure a uniform implementati on and application of  the authorisation 
requirements across the EU. 
From a legal perspective, however, it is clear that if ESMA is awarded formal 
competence to authorise CCPs, it must also have the competence to withdraw the authorisation, if need arises. This raises issu es of fiscal responsibility for the Member 
State where the CCP is located. 
Option 1.6. (EU authorisation and supervision)
 
This option is diametrically opposite to opti on 1.3. It foresees that  authorisation and 
supervision of CCPs would be  given to ESMA. Central au thorisation an d supervision 
would immediately ensure a c oherent application of rule s and would therefore also 
address the cross-border issue. ESMA woul d ensure that Member States' interests 
and concerns are balanced. Since ESMA ha s legal personality, any authorisation and 
supervision decisions would be attributed to the EU. 
This solution would address the issue of th e free provision of services and foster 
confidence among national competent author ities. However, it has a fundamental 
flaw: it does not align fiscal and supervisor y responsibility. Indeed, in the absence of 
an EU-wide resolution fund (or burden shari ng agreement), the fiscal responsibility 
would be left with the Member States. 
Table 9: Summary of the impact analysis  for operational objective 1 (cross-border 
provision of CCP services – s upervision and authorisation) 
 Impact on stakeholders Effectiveness Efficiency 
Option 1.3. 
(national authorisation 
and supervision - baseline) n.a. n.a. n.a. 
Option 1.4. 
(national authorisation 
and supervision + 
stronger college) (+) country with fiscal 
responsibility maintains 
authorisation and supervision power 
(+) increased role for 
authorities in the college (+) involvement of other concerned 
authorities by means of college opinion 
strengthens passport effect, as barriers related to lack of trust dismantled 
(+) supervisory and fiscal 
responsibilities aligned 
(?/-)  potential divergences in 
application of authorisation 
requirements across EU n.a. 
Option 1.5. 
(EU authorisation, 
national supervision) (-) country with fiscal 
responsibilityloses power to 
authorise (+) uniform implementation and 
application of authorisation 
requirements across EU 
(?/-) potential differences in national 
supervision 
(-) misalignment of supervisory and 
fiscal responsibilities n.a. 
Option 1.6. 
(EU authorisation and 
supervision) (-) country with fiscal 
responsibility looses 
supervisory control over CCP (+) coherent application of rules and 
supervision, no uncertainty about cross-
border service provision 
(-) misalignment of supervisory and 
fiscal responsibilities n.a. 
 
 
EN 77   EN 7.1.6.2.  Options for operational objective 2 (links) 
Option 2.1. (rely on Code of Conduc t, ESCB-CESR recommendations)  
The analysis for this option is already provided in section 7.1.3.6. 
Option 2.2. (introduce a conditional right to establish links with additional 
conditions)  
Compared to option 2.1., this option should result in more links being established, 
with a higher level of choice for investor s and more competition in the CCP space. 
This is due to the fact that this option a ddresses the regulatory barriers and issues 
related to risk highlighted by the Code of Conduct. The bene fits of this option should 
therefore be greater than the ones of op tion 2.1. At the same time, the costs should 
not be greater, and may even decrease compared to option 2.1. due to faster and 
clearer procedures to establish links. 
The only potential issue with this option ar e the additional conditions. In practice it 
may be very difficult to define the appr opriate threshold for the conditions. Indeed, 
questions concerning a prior competition analysis (e.g. determining the relevant 
market and making a judgement on the optimal  number of CCPs serving a market) or 
user demand (e.g. the minimum necessary level of user support for approving a link 
request, who are relevant users…) ar e inherently difficult to answer. 
Option 2.3. (introduce a right to establish links conditional upon regulatory approval 
and adequate risk mitigation)  
This option goes further than option 2.2. in th at it only considers ri sk-related aspects 
of links. This option should lead to th e establishment of more links, more 
competition and therefore to higher bene fits than option 2.2. By eschewing the 
additional conditions of Option 2.2, it also re duces administrative costs and increases 
legal certainty. This option also limits the pot ential for an excessive proliferation of 
links by requesting prior supervisory a pproval and requiring CCPs to identify, 
monitor and mitigate the risks that may arise from those links. 
Table 10: Summary of the impact analys is for operational ob jective 2 (links) 
 Impact on stakeholders Effectiveness Efficiency 
Option 2.1. (baseline) n.a. n.a. n.a. 
Option 2.2. 
(right to establish links 
subject to conditions 
related to 
demand/competition, risk controls and prior approval) (+) If conditions met, 
increased user choice 
(+) If conditions met, new 
entrant CCPs able to become 
interoperable and hence grab market share 
(-) If conditions met,  
incumbent CCP subject to 
increased competition (+) Market opening if 
conditions are fulfilled and put a limit to excessive 
proliferation of links due to 
need for prior approval and risk controls 
(≈/-)Inherent difficulty of 
making conditions related to 
user demand and prior competition analysis legally 
operational, hence lingering 
legal uncertainty of extent of right. (≈/-) Administrative cost of 
determining whether user demand/ competition 
conditions met 
Option 2.3. 
(right to establish links 
subject to conditions (+) If conditions met, 
increased user choice 
(+) If conditions met, new (+/++) Ensure market opening 
if conditions fulfilled and put 
limit to excessive proliferation (≈) 
 
EN 78   EN related to risk controls 
and prior approval) entrant CCPs able to become 
interoperable and hence grab market share 
(-) If conditions met,  
incumbent CCP subject to increased competition of links due to need for prior 
approval and risk controls 
 
7.1.6.3.  Options for operational objective 3 (prevent competition on risk) 
Option 3.1. (rely on ESCB-CESR recommendations)  
The analysis for this option is already provided in section 7.1.3.6. 
Option 3.2. (introduce common risk standards)  
Prescribing the common risk standards s hould avoid a situation where CCPs would 
start cutting corners on their risk manageme nt. To the extent that the existing risk 
standards of some CCPs are below the leve l at which the common would be set, the 
introduction of common standards could actua lly increase the overall quality of risk 
management (the converse is, however, also true). For both these reasons, this option 
is better than option 3.1. Of course, the crucia l question in this case is at what level 
the common standards should be set. 
The impact on CCPs and market participan ts will depend on where a CCP's risk 
management would be positioned with respect to the common standards. For a CCP 
with risk standards below the required level it would mean a tightening of risk 
management, which would in all likelihood resu lt in an increase in the costs for its 
users. Conversely, a CCP with standards a bove the level set in the common standards 
could potentially decide to lower them and therefore decrease the costs for its users. 
The lowering of standards is not a fo regone conclusion, th ough. If the CCP with 
higher risk management standards was under competitive pressure from the CCP 
with the lower standards, the introduc tion of the common standards may actually 
dampen this competitive pressure. Obvi ously, the size of the impact would be 
directly proportional to the difference betw een the CCP's existing risk standards and 
the level set in the common standards. The costs of this option would be higher than 
those of option 3.1. (especially if option 3.1. would result in a race to the bottom). 
However, provided that the level of the common standards would not be set too high, 
these costs should not outweigh the benefits of this option. Furthermore, since this 
option would only prescribe the targets, bu t not how to achieve them, it would leave 
CCPs some flexibility in choosing the most cost-effective way of doing it. 
Option 3.3. (harmonise risk models)  
This option would go a step further than  option 3.2. and would actually prescribe 
how a CCP's defences should be structured and how ri sk management should be 
done. Compared to option 3.2., this option would bring few additional benefits 
(assuming that the targets of the harmoni sed model coincide with those of the 
minimum risk standards). The most signifi cant one of them would potentially be the 
lowering of administrative and IT costs for the users of CCPs. I ndeed, if all CCPs ran 
the same risk model, then their users woul d not need multiple IT systems to manage 
their relationships with multiple CCPs. 
 
EN 79   EN This option would, however, entail significan tly higher costs than option 3.2. This is 
because CCPs have adopted different soluti ons. Harmonising their risk management 
would mean that at least some of them may need to radically cha nge their processes, 
which would entail considerable investment costs. This type of harmonisation would 
also have a negative effect on innovation. 
Table 11: Summary of the impact analys is for operational objective 3 (preventing 
competition on risk) 
 Impact on stakeholders Effectiveness Efficiency 
Option 3.1. (baseline) n.a. n.a. n.a. 
Option 3.2. (minimum 
risk standards) (+) regulators gain comfort 
that CCPs manage risk in 
stringent manner 
(-) cost for members of CCP 
whose risk management is 
currently below minimum level (+) no race to the bottom 
(competition on risk) (+) While potentially increased 
cost as stringency of risk 
management increase these 
costs mitigated by freedom to choose most cost-effective 
solution 
Option 3.3. (harmonise 
risk models) (+) regulators gain comfort 
that all CCPs have same model 
(+) lower administrative and IT 
costs for CCP users 
(-/--) significant adaptation for 
CCPs to harmonised risk model (+) no race to the bottom 
 (-) impact on innovative 
approaches to manage 
risk; risk models set by legislation 
 (-) significant investment costs 
by CCPs 
 
7.1.6.4.  Options for operational obj ective 4 (portability) 
Option 4.1. (rely on existing national rules and industry initiatives)  
The analysis for this option is already provided in section 7.1.3.6. 
Option 4.2. (require CCPs to provide segreg ation and leave par ticipants to choose 
whether or not to use it)  
This option differs from option 4.1. in that  it introduces a requirement for CCPs to 
provide for segregation (MiFID  currently deals mainly w ith the segregation at the 
GCM level). The fact that they are currently  not required to do so does not mean that 
CCPs do not offer this possibility. In fact, th ey usually do. From the point of view of 
market participants accessing a CCP indire ctly (indirect participants) not much 
would therefore change. They would keep th e option that in many cases they already 
have.  
The problem with the status quo, and theref ore with this option, is that indirect 
participants often choose not  to have separation at CCP level for purely economic 
reasons: segregation is more expensive due to the effects described in section 6.1.2.2. 
(in short, with segregation at CCP level GCMs would lose some of the revenues and 
would therefore try to recuperate them by charging higher clearing fees to their 
clients). 
To the extent that market participants accessing a CCP indirectly did not have the 
possibility to have their margin segregat ed at CCP level because the CCP did not 
offer them this possibility, this opti on would bring some additional benefits 
compared to option 4.1. The costs for market  participants would depend on the level 
 
EN 80   EN of segregation chosen, but would almost cer tainly be higher th an under option 4.1. 
However, given that the choice of whether to segregate or not w ould be left to the 
market participants, only those that would have a positive net benefit would decide in 
its favour. Any opportunity cost that GCMs may incur due to segregation would probably be recuperated through higher clea ring fees. One additional cost would be 
the loss of some netting efficiency at the aggregate level. 
For those market participants that would not  choose full segrega tion, the problem of 
timely access to their margin in case of the default of their GCM, and thus of 
portability of these margins, would not be solved. 
Option 4.3. (require CCPs to provide segr egation and participants to use it)
 
Given that this option obliges indirect pa rticipants in a CCP to use segregation 
through nominee accounts, it eliminates the is sue of portability (to the extent that 
there are no legal obstacles to it). From this perspective, the benefits of this option are higher than those for option 4.2. However, this also imposes higher costs on those indirect participants that w ould not have chosen full segregation were they given the 
choice. 
Table 12: Summary of the impact analysis  for operational objec tive 4 (segregation) 
 Impact on stakeholders Effectiveness Efficiency 
Option 4.1. (baseline) n.a. n.a. n.a. 
Option 4.2. (possibility 
segregation) (+) Increased protection for clients that 
choose to segregate 
(-) no increased protection for clients that 
choose not to segregate. (+) Portability largely 
delivered. (+) Clients would 
chose solution with 
highest net benefits 
Option 43. 
(segregation 
obligation) (-) High costs for clients that would have 
chosen not to exercise right under option 
4.2. (++) Portability ensured 
 (-) high costs of 
implementation 
7.1.6.5.  The preferred options 
The preferred policy options are clearly marked in the tables summarising the 
impacts of the examined policy options. 
7.1.6.6.  The social impacts 
The analysis of option 6.2.4. applies. 
7.1.6.7.  The environmental impacts 
The analysis of option 6.2.5. applies. 
7.1.6.8.  The impacts on third countries 
The rules resulting from the preferred polic y options would have an impact on third-
country CCPs. In particular, they would ha ve to comply with those rules (or prove 
that the rules to which they are subject to in  their come jurisdicti ons are equivalent to 
the EU rules) in case they wanted to offer their services to EU market participants. 
At the same time, the Commission will need  to continue monitoring that EU CCPs 
wishing to offer their services in third c ountries will not be discriminated against. 
 
EN 81   EN 7.1.7.  The preferred policy instrument 
The analysis of section 6.2.7. is true even in relation to the part of the future 
instrument that would deal with the au thorisation and operat ion of CCPs, which 
could be considered as a typical, traditional taking-up of business type of measure. In fact, there is a major difference with this "traditional" approach; the instrument will 
oblige market participants to use CCPs. This departs from the traditional facilitation and optionality aspects of financial services legislation, i.e., that we create a framework for the cross-border operation of entities and then leave to the markets 
and to the market participants the choice of  using them or not. Here on the contrary, 
we will be obliging market participants to use these infrastructures, wherever they are located and without an option. In that respect, the existence of precise common 
rules is paramount and this is best achieved through a regulation. 
7.2. Trade repositories 
7.2.1.  Background 
A trade repository is an entity that has its origins in the OTC derivatives market.
163 It 
is a centralised registry that maintains an electronic database of open OTC derivative transaction records (contracts). A trade repos itory may also engage in other services, 
such as contract events management a nd trade processing services. The primary 
public policy benefit of a trad e repository is the increased transparency allowed by its 
record-keeping function and the integrity of information it maintains. 
As already mentioned in this report, only two trade repositories currently exist, one 
for credit derivatives (the DTCC's Ware house Trust) and one for interest rate 
derivatives (TriOptima's IR TRR).
164 The second one was launched only at the 
beginning of this year. 
7.2.2.  The political mandate 
In its October 2009 Communication, the Comm ission stated that trade repositories 
should be regulated in order to ensure th at they are operated in a safe, sound and 
efficient manner. It also expressed its be lief that ESMA should be responsible for 
authorising and supervising trade repositories. 
In its Conclusions of 2 December 2009, th e Council stated that the Commission 
should work towards proposing a common legal framework for trade repositories and consider the role and functions ES MA should have in this context.
165 
In its Resolution, the European parliament  welcomed the Commission’s intention to 
submit legislative proposals on trade repositories.166 
                                                 
163  In essence it performs, for bilaterally cleared cont racts, the same record-kee ping functions that a CCP 
performs in case of centrally-cleared derivatives contracts. 
164  Interest Rate Trade Reporting Repository. 
165  See Annex 3. 
166  See Langen report, paragraph 44. 
 
EN 82   EN 7.2.3.  The problems 
The main problem that arose during the crisis concerned the speed with which 
regulators could access the information st ored in the credit derivatives trade 
repository (the only trade repository that ex isted at the time). This situation was 
mainly due to the fact that, up until ve ry recently, the trade repository was not a 
regulated entity, so to the extent that in formation needed to be asked through legal 
means (e.g. a court order) or required the cons ent of the clients of the trade repository 
it took time for regulators to obtain it. 
With the systemic role that trade repositories will gain because of the reporting 
requirement, the question of access to information by regulators will become even more important. In addition, se veral other aspects of a trad e repository's business will 
need to be addressed because of th e reporting requirement. These include 
authorisation/registration of trade reposito ries, access to and participation in a trade 
repository, disclosure of data, data qua lity and timeliness, access to data, 
safeguarding of data, governance and operationa l reliability, bundling of services etc. 
7.2.3.1.  Problem tree 
Figure 14 below provides an overview of the various problems , their drivers and 
their consequences. 
Figure 14: Problem tree 
Lack of common 
legal framework 
governing the 
activities of trade 
repositoriesDrivers Problems Consequences
Un-level playing 
field for the 
provision of trade 
repository servicesLimited access by 
regulators to 
information stored 
in trade repositoriesLack of 
transparency for 
regulators
Inefficient and 
potentially unsafe 
provision of trade 
repositories servicesLack of common 
legal framework 
governing the 
activities of trade 
repositoriesDrivers Problems Consequences
Un-level playing 
field for the 
provision of trade 
repository servicesLimited access by 
regulators to 
information stored 
in trade repositoriesLack of 
transparency for 
regulators
Inefficient and 
potentially unsafe 
provision of trade 
repositories services 
7.2.3.2.  How would problems evolve  without EU action? 
At present, the two trade repositories are regulated under national rules: TriOptima's 
IR TRR is regulated by the Swedish Financial Supervisory Authority while DTCC's Warehouse Trust is regulated by the Federa l Reserve Bank of New York and the 
New York State Banking Department. In bo th cases, access to data would require a 
Memorandum of Understanding (MoU) be tween the direct regulators and any 
competent authority requiring the data. The already mentioned OTC Derivatives 
Regulators' Forum has as one of its object ives the development of international 
cooperative oversight arrangements that ma y be applied to trade repositories. 
Since there are currently no internationally  agreed regulatory standards for trade 
repositories, CPSS and IOSCO have be en tasked to develop a set of 
 
EN 83   EN recommendations to fill this gap. The reco mmendations are expected by the end of 
this year.167 
7.2.4.  The objectives 
The main policy objectives are to provide safe, sound and efficien t trade repositories 
that will provide the necessary support for the reporting requiremen t, and ensure that 
competent authorities have the necessary  information to perform their duties. 
Reaching this general objective requires th e realisation of the following more 
specific policy objectives: 
(1) ensure the safety and integrity of data stored in a trade repository; 
(2) establish a level playing field for the provision of trade re pository services; 
(3) ensure that competent authorities ha ve unfettered access to the information 
stored in trade repositories. 
The specific objectives listed above require  the attainment of  a single operational 
objective, namely the introduction of comm on rules governing the activities of trade 
repositories. 
An overview of the various objectives and th eir interrelations is depicted in Figure 15 
below. 
Figure 15: Overview of objectiv es and their interrelations 
Ensure the safety, 
soundness and 
efficiency of trade 
repositoriesEnsure the safety 
and integrity of data 
stored in a trade 
repository 
Ensure a level 
playing field for the 
provision of trade 
repository services
Ensure that 
regulators have 
unfettered access to 
information stored 
in a trade repositoryIntroduce common 
rules governing the 
activities of trade 
repositoriesGeneral 
objectivesSpecific 
objectivesOperational
objectives
Ensure the safety, 
soundness and 
efficiency of trade 
repositoriesEnsure the safety 
and integrity of data 
stored in a trade 
repository 
Ensure a level 
playing field for the 
provision of trade 
repository services
Ensure that 
regulators have 
unfettered access to 
information stored 
in a trade repositoryIntroduce common 
rules governing the 
activities of trade 
repositoriesGeneral 
objectivesSpecific 
objectivesOperational
objectives
 
7.2.5.  The policy options 
The basic policy options for the only operational objective are the following: 
                                                 
167 CPSS and IOSCO have recently  launched a consultation on a set of cons iderations for trade repositories in 
the OTC derivatives market and for relevant auth orities. See http://www.bis.org/press/p100512.htm. 
 
EN 84   EN • Option 1.1.:  Rely on CPSS-IOSCO recommenda tions for trade repositories 
and cooperation among regulators (baseline scenario) 
• Option 1.2.:  Introduce legislation go verning the activities of trade repositories 
An important question that needs to be a ddressed is the distribution of regulatory 
responsibilities between the various national (and potential ly European) authorities 
that have a direct interest in the safe and efficient operations of a trade repository. 
Since activities of trade repositories do not  raise issues of prudential concern to 
regulators compared to, for instance, the risk management of a CCP, instead of a 
system of authorisation and supervision, a less intrusive system of registration and 
surveillance (to be distinguished from 's upervision' or 'oversight') over trade 
repositories should therefore be sufficient to  achieve the objectiv es sought. The basic 
policy options addressing th is topic are the following: 
• Option 1.3.:  National registration and surveillance (baseline scenario). 
• Option 1.4.:  EU registration and surv eillance performed by ESMA. 
In both scenarios oversight of  trade repositories would be  performed by the relevant 
central banks. 
7.2.6.  Analysis of impacts and choice of preferred policy option(s) 
7.2.6.1.  Option 1.1. (rely on CPSS-IOSCO recommendations) 
Currently, there is no set of common rules a pplicable to trade repositories, neither at 
EU nor at international level. As alr eady indicated, recommendations are currently 
being developed by CPSS-IOSCO. Once th ey will be ready, they will provide 
guidance to national regulators. Howeve r, they would suffer from the same 
shortcoming as the other recommendations , i.e. they would provide only broad 
principles. This means that they could resu lt in widely differi ng regulatory solutions 
in the various Member States. This could introduce a multiplicity of different rules applicable to the activities of trade repos itories. Since the latt er are by definition 
entities which provide their se rvices cross-border, this w ould result in the need for 
multiple authorisations and compliance with  multiple rules, increasing unnecessarily 
their costs. 
7.2.6.2.  Option 1.2. (introduce legislation) 
This option would eliminate the shortcomi ngs of option 1.1. by providing a single set 
of rules applicable to any trade repository  operating in the EU. In view of the 
importance of these entities for ensuring transparency about the OTC derivatives 
market and effective supervision of this ma rket, it is paramount that they are subject 
to a common set of binding rules. Furthe rmore, the reporting requirement calls for 
safeguards to be put in place to prevent that  trade repositories will abuse their role at 
the expense of the entities that will be subjec t to this requirement. Again, this is best 
achieved through binding rules applicable throughout the EU. This option will also 
mean that the cross-border provision of se rvices would not enta il any additional 
costs, as the same rules would apply in any EU Member State. 
 
EN 85   EN *   *   * 
7.2.6.3.  Option 1.3 (national registration and surveillance)  
This approach mimics the usual authoris ation and supervision regime common in 
financial services. Under this approach, a trade repository would register with its 
national competent authority, which would also be respons ible for ensuring the trade 
repository's proper functioning. However, th e reporting obligati on on all EU market 
participants and the need to ensure unfe ttered access for EU regulators is likely to 
result in cumbersome and possibly not fric tionless procedures, if the organisation of 
data access would fall under the responsibility of the na tional competent authority 
where the trade repository would be established. While dispute resolution procedures within ESMA would apply, this approach w ould not be most dir ect and efficient way 
to organise regulatory governance of trade repositories across th e EU. It would also 
complicate cooperation with regulators of tr ade repositories located outside of the 
EU. 
7.2.6.4.  Option 1.4. (EU registration and surveillance)
 
As the main purpose of trade repositories is to provide services to the regulatory 
community, centralised regi stration and surveillance seems the most efficient 
approach. In this way, ES MA could act as the gatewa y for information requests 
aimed at a trade repository. This would facilitate a standardisation of access procedures to trade repositories located in different Member States . In addition, data 
confidentiality issues coul d be handled in a transpar ent and non-discriminatory 
manner and conflicts between requesting national authorities directly resolved. Moreover, ESMA could act as a central poi nt channelling information requests to 
trade repositories located out side the EU. This centralisation would reduce costs for 
both trade repositories  and regulators. 
This option is superior to option 1.3. bot h from the point of view of costs and 
benefits. 
7.2.6.5.  The preferred options 
Based on the above impact analysis, the pr eferred policy options are options 1.2 and 
1.4. 
7.2.6.6.  The social impacts 
The analysis of option 6.2.4. applies. 
7.2.6.7.  The environmental impacts 
The analysis of option 6.2.5. applies. 
7.2.6.8.  The impacts on third countries 
Similarly to the case of CCPs, the rules re sulting from the preferred policy options 
would have an impact on third-country trad e repositories. In particular, they would 
have to comply with those rules (or prove th at the rules to which they are subject to 
in their come jurisdictions are equivalent to  the EU rules) in case they wanted to 
 
EN 86   EN offer their services in the EU. Given that  authorities based in the EU would need 
unfettered access to informati on stored in trade repositories  located in third countries, 
the recognition process would need to spec ifically establish that such access is 
actually possible. If not, the direct conse quence would be that no third-country trade 
repository would be able to offer its se rvices in the EU for the purpose of the 
reporting requirement. 
As in the case of CCPs, the Commission w ill need to continue monitoring that EU 
CCPs wishing to offer their services in third countries will not be discriminated 
against. 
7.2.7.  The preferred policy instrument 
The analysis of section 6.2.7. is true even in relation to the part of the future 
instrument that would deal with the author isation and operation of  trade repositories. 
 
EN 87   EN  
8. MONITORING AND EVALUATION  
Ex-post evaluation of all new legislativ e measures is a top priority for the 
Commission. Evaluations are planned about 5 years after the implementation deadline of each measure. The forthcomi ng Regulation will also be subject to a 
complete evaluation in order to assess,  among other things, how effective and 
efficient it has been in terms of achieving the objectives presented in this report and 
to decide whether new measures or amendments are needed. 
In terms of indicators and sources of information that  could be used during the 
evaluation, a distinction needs to be made  between the evaluation of the measures 
aimed at addressing transparency, counterpart y credit risk and ope rational risk, and 
the measures aimed at establishing a common regulatory framework for CCPs and 
trade repositories. 
For the first group of measures, especia lly for monitoring the reporting and the 
clearing requirement, the most convenient source of information will be the trade 
repositories. The information they store wi ll allow for the monitoring of indicators 
such as the size of the various market segm ents, the proportion of contracts subject to 
CCP clearing, the relative importance of diffe rent groups of market participants and 
so forth. For monitoring the progress in terms of contract and process 
standardisation, existing sour ces could be used, such as the various ISDA surveys 
and the indicators published by MarkIt. The indicators that could be used are, for 
example, the proportion of contracts that ar e electronically affirmed and confirmed, 
the average age of unconfirmed contracts,  the proportio n of trades covered by 
collateral agreements, the number of collate ral disputes and so on. For the clearing 
requirement a potential indicator  could also be the types of contracts that are subject 
to the requirement and the number of CCPs that are being used in relation to it. 
For the second group of measures, finding mean ingful indicators would seem to be 
more difficult. A potentially better approach  could be a questionnaire directed at 
market participants and the operators of the market infrastructure on whether the 
changes made reduced the risks they face in their daily business. 
 
 
EN 88   EN ANNEX 1: Glossary168 
 
Affirmation (of a trade confirmation) A pro cedure in a confirmation process, whereby a 
single record of the trad e is created by one party 
evidencing the full terms of the trade and the counterparty verifies and agrees to that record. 
Affirmation of trade confirmations is different from trade verification (also known as economic affirmation), which is limited to principal economic terms 
Arbitrage The exploitation of pr ice differences in connected 
markets. 
Bilateral collateral agreement An agreement that defines the terms or rules under 
which collateral is posted or transferred between 
counterparties to an OT C derivative contract. 
Central counterparty (CCP) An entity that interposes itself between the 
counterparties to the contract s traded in one or more 
financial markets, becoming the buyer to every seller 
and the seller to every buyer. 
Clearing The process of establ ishing settlement positions, 
including the calculation of net positions, and the process of checking that s ecurities, cash or both are 
available for the settlement  of obligations. In other 
words it is the process used for managing the risk of Ö open positions.  
Collateral An asset or third-part y commitment that is used by 
the collateral provider to secure an obligation to the collateral taker. Collateral arrangements may take different legal forms; collateral may be obtained using the method of title tran sfer or pledge. See also 
margin. 
Confirmation A document identifying the details of a trade and any 
governing legal documentation, as agreed upon by both parties. This document se rves as the final record 
of the transaction 
Confirmation process The process by whic h trade details are verified with a 
counterparty, with a view to obtaining a final record 
of the trade. This is ge nerally done by exchanging a 
                                                 
168 This glossary draws partly on glossaries contained in various reports published by Committee on Payment 
and Settlement Systems of the Bank for International Settlements. 
 
EN 89   EN confirmation proposal via fa x, mail or an electronic 
confirmation service. Either  one party provides trade 
details and the other then ve rifies the information, or 
both parties submit records of the trade and verify each other’s records. 
Counterparty credit risk The risk that  a counterparty wi ll not settle an 
obligation for full value, either when due or at any time thereafter. Credit risk includes pre-settlement risk (replacement cost risk) and settlement risk (principal risk). 
Coupon The regular payment on a c ontract, often also referred 
to as premium or Ö spread. The coupon can be fixed 
or floating. 
Credit event An event that may trigger the exercise of a CDS 
contract. Credit events include, for example, failure to pay (interest or principa l when due), bankruptcy or 
Ö restructuring. 
Default fund A fund composed of assets contributed by a CCP’s 
participants that ma y be used by the Ö CCP in 
certain circumstances to cover losses and liquidity pressures resulting from defaults by the CCP’s participants. Also known as clearing fund. 
Exposure The amount of funds at risk, i.e. the amount that one 
may lose in an investment. 
General clearing member (GCM) A member of a Ö CCP that clears on its own behalf, 
on behalf of its customers and on behalf of other market participants. 
Hedge A Ö position established in one market in an attempt 
to offset Ö exposure to the risk of an equal but 
opposite obligation or position in another market. 
Leverage A financial ratio that compares some form of owner's 
equity (or capital) to bo rrowed funds. The higher are 
the borrowed funds with re spect to own capital, the 
higher is the leverage. 
Margin An asset (or third-party commitment) that is accepted 
by a counterparty to ensure  performance on potential 
obligations to it or cover market movements on unsettled transactions. 
Marking to market The practice of revaluating open positions in 
financial instruments at curre nt market prices and the 
calculation of any gains or losses that have occurred 
 
EN 90   EN since the last valuation. 
Master Agreement An agreement that sets forth the standard terms and 
conditions applicable to all or a defined subset of transactions that the partie s may enter into from time 
to time, including the terms and conditions for closeout netting. 
Multilateral netting Netting on a multilateral basis by summing each 
participant’s bilateral net positions with the other participants to arrive at a multilateral net position. Such netting is often conducted through a central counterparty (but it ca n also be done by other 
entities). In such cases the multilateral net position represents the bilateral net position between each participant and the central counterparty. 
Multilateral trading facility (MTF) A multila teral system, operated by an investment 
firm or a market operator,  which brings together 
multiple third-party buying and selling interests in 
financial instruments - in the system and in 
accordance with non-discreti onary rules - in a way 
that results in a contract. 
Netting The offsetting of positions or obligations by 
counterparties. 
Notional amount The reference amount on which a derivative contract 
is written. 
Novation The replacement of a contract between two initial 
counterparties to a contract (the transferor, who steps 
out of the deal, and the remaining party) with a new contract between the rema ining party and a third 
party (the transferee). 
Open interest The total number of open derivative contracts on a 
specific underlying. 
Plain vanilla transactions Generally used  to refer to a type of derivatives 
transaction with simple, common terms that can be 
processed electronically. Transactions that have unusual or less common featur es are often referred to 
as exotic, structured or bespoke. 
Portfolio reconciliation The process of verifying the existence of all 
outstanding trades with a pa rticular count erparty and 
comparison of their prin cipal economic terms. 
Portfolio compression  Ö Multilateral netting. 
 
EN 91   EN Position The stance an investor takes vis-à-vis the market. An 
investor's position is said to be long (short) when she buys (sells) a financial instrument. 
Reference entity A corporate, a sovereign or any other form of legal 
entity which has incurred debt, on which a CDS is written. 
Restructuring One of the Ö credit events that may trigger the 
exercise of a CDS contra ct. The term denotes a 
change in the legal terms of an issuer's ( Ö reference 
entity) obligation, such as the reduction in the obligation principal, the reduction in the contractually agreed interest payments and the deferral of interest or principal payments. 
Segregated account An account used for the Ö segregation of a client's 
assets 
Segregation A method of protectin g a client’s assets by holding 
them separately from those of the custodian (or other clients, as the case may be). 
Settlement The completion of a transaction, wherein the seller 
transfers securities or financial instruments to the buyer and the buyer transfer s money to the seller. 
Speculation The act of making an  investment, i.e. taking a Ö 
position in the market, without certainty of being able to recover the initial investment or earning a return on the investment. 
Straight through processing (STP) The auto mated end-to-end processing of trades 
including, where relevant, the automated completion of confirmation, matching, generation, and clearing 
and settlement of orders. 
Trade matching The process by which both counterparties to a trade 
create a written or electronic record evidencing the full terms of the trade. These two records are then compared and considered matched if they are identical. 
Trade repository A centralised registry that maintains an electronic 
database of open OTC deri vative transaction records 
(contracts). 
 
 
EN 92   EN ANNEX 2: Future policy actions for ensuring  efficient, safe and sound derivatives 
markets 
 
Objective Proposed actions Time line 
Reduce counterparty credit 
risk - strengthen clearing Propose legislation on CCP requirements, governing:  
(a) safety requirements (e.g. conduct of 
business, governance, risk management, legal protection of 
collateral and positions) 
(b) authorisation/withdrawal of 
authorisation and supervision of CCP 
(c) mandating of CCP clearing of 
standardised derivatives 
Amend CRD in order to: 
(d) Mandate financial firms supplying 
initial and variation margin; 
(e) Substantially differentiate capital 
charges between CCP-cleared and 
non-CCP cleared contracts in CRD;  Mid 2010 
 
  
 
  
 
  
 
End-2010 
 
 
Reduce operational risks - 
standardisation  Assess whether to re-shape the operational risk 
approach in the CRD to pr ompt standardisation of 
contracts and electronic processing. 
Work with industry to increase standardisation of legal 
regimes and processes; End 2010 
 
 
 
On-going 
Increase transparency - trade 
repositories  Propose legislation on trade repositories: 
(f) Regulate trade repositories 
(g) Mandate reporting of OTC 
derivatives transactions to trade 
repositories;  Mid-2010 
Increase transparency – 
trading Amend MiFID to require transaction and position 
reporting to be developed in conjunction with CCPs 
and trade repositories;  
Ensure trading of standardised contracts on organised 
trading venues under MiFID; 
Enhanced trade and price tr ansparency across venues 
and OTC markets, as appropriate, in MiFID; 
Conclude review of exemptions from MiFID for 
commodity firms. End-2010 
Improve market integrity Extend MAD to OTC derivatives; 
Give regulators the power to set position limits in 
MiFID. End-2010 
 
 
EN 93   EN  
ANNEX 3: 2 December 2009 Council conclusion s on derivatives markets and clearing 
and settlement169 
 
The Council adopted the following conclusions: "1. The Council RECALLS the Conclusions of the European Council of 18/19 June 2009, 
where the European Council called for "further progress to be made in the regulation of 
financial markets, notably on transparency  and stability of de rivatives markets." 
2. The Council RECOGNISES the global dimensi on of derivatives mark ets and the need for 
a level playing field, as agreed by G-20 l eaders at their meeting on 25 September 2009, 
where they called i.a.  for: "Improving over-the-count er derivatives markets: All 
standardized OTC derivative contracts shoul d be traded on exchanges or electronic 
trading platforms, where appropriate, and cleared through central counterparties by end-
2012 at the latest. OTC derivativ e contracts should be report ed to trade repositories. Non-
centrally cleared contracts should be subject to higher cap ital requirements." 
3. The Council also STRESSES the importance of the two related workstrands set out in the 
ECOFIN roadmap adopted by the Council (ECO FIN) on 20 October as an annex to its 
conclusions on strengthening EU financ ial stability arrangements, namely: 
– "Increasing the safety for " over the counter" derivatives ma rkets, by : the clearing of 
standardized OTC derivative contracts th rough central counter parties and, if not, 
higher capital requirements; the reporting of non-standardized deriva tive contracts to 
trade repositories"; 
– "Improve transparency in use of derivatives". 
4. The Council broadly WELCOMES the future actions announced by the Commission in 
its Communication on "Ensuri ng efficient, safe and sound de rivatives markets - Future 
policy action". On that basis, the Council, bearing in mind the afor ementioned declaration 
of G-20 leaders in Pittsburgh: 
5. Broadly WELCOMES the paradigm shift in the approach towards derivatives markets 
suggested by the Commission, namely moving from so-called "light-handed regulation" 
to a more ambitious and comprehensive regul atory policy, that is aimed at reducing 
counterparty and operational risks, increasing tr ansparency of the derivatives market and 
strengthening market integrity and oversight and, opera tionally, is expected to shift 
derivatives trading and clearing from predom inantly OTC bilateral transactions towards 
centralised trading and clearing infrastructures; 
6. STRESSES in that respect , as noted by the Commissi on, the need to have a 
comprehensive policy on OTC derivatives in order to avoid regulat ory arbitrage and, at 
the same time, to take into account differences across classes of instruments and contracts, as well as those of specific market  participants, incl. non- financial firms, and 
                                                
 
169  Available at http://www.consilium.europa.eu/ueDocs /cms_Data/docs/pressdata/ en/ecofin/111706.pdf. See 
p. 26-30. The relevant passage is reported in its entiret y, although not all of the points are relevant to this 
report. 
 
EN 94   EN commodity markets, e.g. for gas and electric ity. Any future policy option should ensure 
that non-financial institutions can continue ma naging the risks inherent  to their business, 
without incurring disproportionate costs; a nd where appropriate should allow them to 
tailor risks to individual needs, subject to proper risk mitigation techniques and internal 
controls, but without underpricing risks nor opening regulatory loopholes. 
7. AGREES with the need to improve substantia lly the mitigation of counterparty credit 
risk, and focusing in particular on: 
b. Promoting clearing of clearing eligible derivatives by mean s of one or more central 
counterparties (CCPs) which should be subject  to adequately harmonised regulation and 
supervision and oversight to ensu re improved safety and soundness. 
The Council WELCOMES the joint CESR -ESCB Recommendations for Central 
Counterparties in Europe and broadly WELC OMES the Commission's intention to work 
on appropriate legislative propos als addressing in particular 5 issues, namely: conduct of 
business and governance, risk standards, le gal protection to collateral and positions, 
authorisation and recogniti on of third-country CCPs. 
Taking into account i/ the pan-European reac h and systemic importance of CCPs and ii/ 
the fact that CCPs may ultimately be s upported by fiscal authorities, the Commission 
should propose appropriate inst itutional res ponsibilities; 
c. Recommending the use of CCPs located in Eu rope. The Council recognises that there are 
strong reasons for some CCPs being located in  Europe, relating to regulatory, supervisory 
and monetary policy concerns. 
d. Accordingly, mandating CCP clearing for cl earing-eligible derivatives. The Council 
however RECOGNISES that ther e are limits to the scope of potential standardisation, and 
that non-standardised OTC derivative contract s will therefore remain necessary and that 
proper arrangements need to be in place to  fulfil the aforementioned objectives of 
transparency and safety for the OTC derivatives markets; 
e. Consequently, requiring proper collateralis ation for bilateral cl earing, and making it 
subject higher capital charges than centrally cleared trades, taking into account the risk-
mitigating effect of collateral arrangements and other measures, as well as the impact on the corporate sector. The Council INVITES the Commission to conduct comprehensive 
impact assessments and reflect the principl e of higher capital requi rements for bilateral 
OTC contracts, as agreed at G-20 level in Pi ttsburgh, in future amen dments to the Capital 
Requirements Directive (CRD).  The Commission should take into account the technical 
solutions being developed under th e aegis of the Basel Committee. 
8. Also AGREES with the importance of improvi ng transparency, efficiency and integrity 
for derivative transactions, focusi ng in particular on four issues: 
a. Mandating reporting of transac tions to trade repositories, to be then provided to 
regulators. The Commission s hould work towards proposin g a Common legal framework 
for the regulation, supervision and oversight of trade repositories , incl. the roles and 
functions that may be given i.a. to ESMA  within the overall supervisory framework; 
b. European regulators' and Central banks' access to information stored in trade repositories. 
The Council CONSIDERS that European re gulators and Central banks must have 
 
EN 95   EN unfettered access to complete global information. In the ab sence of such access to 
information in repositories located in third countries, the Council WOULD 
ENCOURAGE the creation and operation of European-based trade repositories; 
c. Ensuring that all relevant trades eligible for exchange-trading take place on organised 
markets; 
d. Enhancing pre-and post-trade transpar ency requirements as appropriate. 
The Commission should include these issues in  its review of the Directive on Markets in 
Financial Instruments (MiFID). 
9. Broadly WELCOMES the Commission's intentio n to work also on mitigating operational 
risk and, within the context of the forthcom ing review of the MiFID and of the Market 
Abuse Directive (MAD), to revise relevant legislative provisions  underpinning market 
integrity and oversight. 
10. Overall, broadly WELCOMES the Commission's intention to put forward, or revise as 
appropriate, several legislativ e proposals (i.e. a possible Pr oposal on CCPs, amendments 
to the CRD; the reviews of MiFID and MAD) . The Council RECALLS in  that respect the 
common / inter-institutional commitment to better regulation and INVITES the 
Commission to carry out a thorough impact asse ssment for the legislation to be proposed, 
working towards addressing the needs of all concerned stakeholders, and seeking 
consistency with existing or emerging international standards, whilst respecting the aforementioned overarching princi ples of market transparen cy and financial stability. 
Clearing and Settlement 11. In the field of clearing and settlement for cas h equities, as clarified by the Commission 
report on the Code of Conduct,  the Council NOTES the pr ogress made in terms of 
increased efficiency and reduced costs for investors, in particular as regards cash-equity CCP-clearing. The Council AGREES with the c onclusion that further steps need to be 
taken to address the issues related to risk  and regulatory barriers that have been 
highlighted by the Code of Conduct. Th e Council TAKES NOTE of the ongoing work 
aiming at increasing legal certainty of secu rities holding and tran saction and INVITES 
the Commission to present its draft legisla tion on securities law as soon as possible. 
12. The Council INVITES the new Commission to c ontinue work with the industry to resolve 
remaining challenges as regards price transparency and comparability, commercial and operational barriers to links and access and service unbundling in the post-trade sector. 
13. The Council RECALLS in that respect it s conclusions of D ecember 2008 where it 
stressed the need for further progress on acces s and interoperability requests, bearing in 
mind financial stability concerns that these arrangements should be compatible with the 
safety and soundness of the post-trading infrastr ucture, and emphasised in particular that 
links between CCPs should comply with high pr udential standards in respect of credit, 
liquidity and operational risks." 
 
EN 96   EN  
ANNEX 4: Summary of fi rst public consultation 
1. I NTRODUCTION  
This document presents a broad non-exhaustive summary of the responses to the consultation 
on OTC Derivatives market. The summary follows the same sections outlined in the consultation document and for each section provides both an overview of the general 
comments received and of the detailed responses to the single questions. 
2. P
ROMOTING FURTHER STANDARDISATION  
General comments 
The Commission Consultation paper had distinguis hed two types of stan dardisation, namely 
that of the contract (the lega l frame) and the contractual para meters (the economic content). 
Several respondents refined st andardisation into the follo wing three subcategories: 
1. Contract uniformity (standard legal relationships, confirmation agreements, 
documentation, market conventions on event handling) 
2. Product uniformity (standard valuati ons, payment structures, dates) 
3. Process uniformity and automation (Strai ght-through processing (STP), matching, 
confirmation and settlement) 
Many respondents found using standardised le gal terms beneficial. Market practice has 
generated model legal frameworks (Master Agr eements), while a few may co-exist (e.g. for 
UK and US legal regime). This might happen naturally in a maturing, more liquid market. 
Commodity derivatives, however, would by na ture be highly specific but there was no 
evidence that they posed a risk to the fina ncial system. However, corporations often 
responded that they would not us e some of those model contract s because they would entail 
market practices not suitable for them (e.g. the provision of collateral, which would expose 
them to liquidity risk). One respondent argued that the recent market agreement on the auction 
settlement for CDS would have  exposed CDS sellers to highe r risk. On the other hand, one 
respondent argued that the standard practice of  "cash settlement" in CDS cause speculation 
and might have hinder access to credit fo r the companies on whose name the CDS was 
written. Other respondents argued that the regulation of invest ment/mutual funds (subject to 
UCITS) required some specific clauses in othe rwise standard CDS contracts to avoid loan 
delivery. 
Product uniformity, as far as standardising th e economic parameters of the contract is 
concerned (provided they are cons istently defined), was widely rejected, since it would limit 
hedging possibilities and might result in a conflict with accounting rule IAS 39. Uniform 
event handling was seen in some cases as pr oblematic, as there was diversity in national 
legislation (e.g. corporate action). However,  one public authority regarded further 
standardisation of contract and economic terms as beneficial, which should be determined in 
an industry/regulator working group. 
The technical standardisation, i.e. automation of  processes was widely seen as beneficial; 
however many respondents emphasised the set-up costs. To achieve this, for example the 
fields to be completed in every transaction could be standardised. Process automation to 
reduce operational risk was ofte n seen as the driver, rather than the consequence, of 
standardisation. Some argued that, especially fo r rather specific needs, the first steps in 
 
EN 97   EN concluding a trade (the brokeri ng) need not be automated. One respondent also argued that 
electronic confirmation on the trad e date may risk resulting in cash flows from the swap not 
matching those of the underlying bond. 
A large number of respondents (with exceptions, though) did not  consider it necessary to 
incentivise standardisation th rough regulatory capital charges,  as markets would have an 
inherent incentive to reduce operational risks anyway. 
Several respondents report that the standardisat ion needed to allow for central clearing (and 
hence reduction of counterpart y risk) should be strictly separated from the kind of 
standardisation/automation that would reduce operational risk. More over, considering only 
centrally-cleared trades as sta ndardised would transfer a regulatory responsibility to clearing 
houses, which pursue the business obj ective of attracting order flow. 
 (1) What would be a valid reason not to us e electronic means as a tool for contract 
standardisation? 
It was pointed out that there was still sc ope to wider use electronic affirmation and 
confirmation to reduce settlement risk. Broker dealers should be required to receive positive 
affirmation from their clients on all OTC deri vative trades. Market participants should be 
invited to explain why the us e of electronic means would not  be possible in some cases. 
However, it was warned that dominant market players might impose their electronic systems 
onto the rest of the market, t hus cementing their market power. 
Clearinghouses stated that "elect ronic means" would work on a general level, but the level of 
standardisation would not be suit able to determine if a contract  was eligible for CCP clearing. 
A market infrastructure provider argued that capturing the complete information of an OTC 
derivative trade in an electronic  format early during its life cycle (Execution – confirmation – 
clearing – data repositor y – life cycle events) should be regarded as a pre-requisite to 
increasing the resilience and the transparency of  the market. The respondent added that, whilst 
the degree of standardisation of  legal terms is relevant for the eligibility of a product for 
electronic processing during all stages of its lif e cycle, its eligibility  for electronic execution 
and clearing would in addition depend on its ac tual liquidity and reli ability of pricing. 
One respondent offered a functional breakdown  of "electronic means" during the trading 
cycle:  
"Electronic execution : should be encouraged wherever possi ble, but with the realisation that 
only liquid segments of certain markets may m eaningfully benefit from that type of high 
transparency environment. Certain types of trade may only occur very infrequently, and 
where price uncertainty exists there is little motivation to risk creating price deviation by the 
mere disclosure of the price. 
Electronic reconciliation and confirmation : potentially a very valuable tool to ensure that 
details of trades are agreed early and accurately, and can be  used in both high and low 
velocity markets. 
Straight-Through Processing (STP) : trade-capture via electronic systems (even if it occurs 
posttrade) allows STP to market participants ’ internal risk and settlement systems. 
 
EN 98   EN Auto routing to depositories and/or CCPs : once trade information is accurately captured it can 
be submitted automatically to clearing and set tlement systems and/or to data depositories. 
Clean data for analys is by regulators : as with trade information submitted to infrastructure, 
accurate, reconciled and ideally netted data can be  made available to regulators for analysis." 
It was pointed out that brokering the contract may not necessarily be electronic; however once 
a trade was agreed the remaining back o ffice work can be done electronically. 
(2) Should contracts standardisation be measured by the level of process automation? 
What other indicators can be used? 
Many respondents argued that a certain level of pro cess automation was possible even without 
standardisation, hence the level of process automation was not an exclusive measure of 
standardisation. So-called "copper"  electronic trade records woul d retain only some key terms 
of a trade. In the same vein, it was argued that  the vast amount of (operational) risk reduction 
would already be achieved by confirming the ke y financial terms of a transaction, which 
would correct the incorr ectly booked trades.  
Also, for example, equity derivatives may have bespoke contracts to deal  with specific legal 
and business risks, but can sti ll be eligible for el ectronic confirmation. However, it was also 
argued that such "short form" automation woul d be a strong impediment to central clearing. 
A focus on execution and confirmation automation levels would provide the best measure for 
standardisation because these processes will use a fully valid legal record of the contract. 
It was suggested to look at the time needed  for two parties from agreeing on a trade to 
reaching a legally binding contra ct (or between transaction in itiation and execution, or, if 
applicable, novation). Furthermore, the number of  failed trades (or erro neous or incomplete 
confirmations) could be ta ken as an indicator. 
Higher trading volumes and the absence of significant (economic and in legal form) 
differences in contract terms could be viewed as indicators. One respond ent answered that the 
ratio of traded turnover over outstanding no minal of underlying instrument, the more 
standardised a contract. 
One bank pointed out that the NY Federal Rese rve considered 20 trades per month in a 
product range, such as interest rates, as the threshold for an electronic process. Similarly, 
another bank suggested setting th e use of electronic trade proce ssing as an industry standard 
depending on the transaction volume, for example fo r entities with at least 10 transactions in 
one asset class or 20 cumulatively per month. 
(3) Should non-standardised contracts face higher capital charges for operational risk? 
This question proved quite controversial, since the use of the term "standardisation" was not 
uniform among respondents (see general remarks and preceding questions). 
Some public authorities argued th at priority should be given to counterparty risk mitigation 
tools. The Capital Requirements Directive (CRD ) already takes operational risks into account 
in general terms; it would be difficult to t echnically introduce a st rengthened recognition for 
non-standardised contracts. To include possi ble losses from manual processes would face 
conceptual problems. This was supported by so me industry answers; neither the Advanced 
 
EN 99   EN Measurement Approach nor the St andard Approach in the CRD w ould be able to capture each 
and every transaction. 
However, one regulator argued that  in practice, novel or increase d operational risk is likely to 
arise more commonly for non-standard contract s. Therefore, compared to standardised 
contracts, higher capital charges may be appropriate more frequently. 
In contrast, others pointed out that, to the ex tent that non-standardis ed contracts were not 
centrally cleared, they already f ace higher capital charges (for c ounterparty risk). It was even 
argued that an extensive standardisation would conflict with the risk mitigation function that 
the CRD would attribute to derivatives. One re spondent would like to s ee proof of correlation 
between non-standard contracts and higher operational risk.  
Others pointed out that non-standardised co ntracts did not only f ace higher operational and 
counterparty risk, but al so higher liquidity risk. While flex ible when written, they become 
inflexible in terms of maintenance and closure.  Operational risk was not the main driver of 
risk for non-standard products. 
In the same vein, a bank suggested to define regulatory targets dir ectly for post-trade 
automation and performance, rather than a ddressing standardisation. Calibrating a possible 
level of regulatory capital charges and ensuring that the system is robust to market changes 
would be a lengthy exercise.  
Further respondents argued that, if it was deci ded to impose higher charges, those should 
relate to the level of process automation and strai ght-through processing rather than 
standardisation on its own. 
Some public authorities thought how ever that higher capital char ges linked to operational risk 
could serve as an incentive to promote standardisation. Some pr ivate-sector re spondents also 
thought that increasing capital ch arges would help to reduce a ppetite for complex and less 
transparent structures. In contra st, banks argued that internal operational risk models were 
already taking into account  the increased risk associated wi th non-standardised contracts. It 
was also thought that moves in th e direction of standardisation we re already in the interest of 
market participants, if justified by volumes, a nd did not need further incentives. For example, 
standardised products would be better priced. It  was pointed out that the industry has already 
committed to more standardisation (ISDA letter to NY Fed, 2 June 2009). 
Corporations were very firm in pointing out th at their use of derivati ves was determined by 
the structure (maturity etc.) of  their liabilities, so that st andardisation of the economic 
parameters of the contracts would undermine their hedging and conflict with accounting 
standards. While some companies acknowledge d that a common understanding of legal terms 
was useful, they would like to retain the free dom not to use standard  collateral agreements. 
It was suggested that regulator s carry out a quick, determined review of existing industry 
associations' framework agreements (both for de rivatives as we ll as their underlying assets). 
Indeed, one regulator suggested establishing a working group to determine 1) a mutually 
acceptable definition of "standardised", and 2) a roadmap for increasing such standardisation. 
(4) What other incentives toward standardis ation could be used, especially for non-
credit institutions? 
 
EN 100   EN It was pointed out that non-credit institutio ns would receive more favourable prices on 
standardised products. In addition, if capital char ges were applied to credit institutions, these 
might be passed on to non-credit ins titutions as spr ead or price. 
One credit institution suggested using the audi t process to monitor the implementation of 
policy objectives by corporations. 
One regulator suggested better educ ation of OTC derivatives users. 
3. S TRENGTHENING BILATERAL COLLATERAL MANAGEMENT FOR NON -CCP  ELIGIBLE 
OTC  DERIVATIVES  
General comments 
Most respondents highlight concern with existi ng statistics (e.g. ISDA) on collateral levels. 
These may under represent the level of collate ral, as they focus on collateral covered by 
Credit Support Annexes (CSAs) and hence do not  focus on collateral pr ovided outside such 
relations. Many respondents therefore argue that it is necessary to improve transparency of 
how exposures are calculated a nd the level of collateral.  
As regards the currently less than full level of collateralisation (one th ird of exposures remain 
uncollateralized), many respondents argue that th is is natural, as many end-users of OTC 
derivatives do not supply collateral (e.g. smaller financial firms, corporates, sovereigns and 
supranational lending institutions).  
The views on the merits of stre ngthening bilateral collateral ma nagement differ considerably 
depending on the type of respondent. Generall y, among financial firms there is a broad 
support for strengthening bilatera l collateral management by (i) increasing collateral levels 
(subject to the comments above) and (ii) im proving the frequency by which exposures are 
marked-to-market and collateral is exchanged.  
Broadly, most financial firms believe that daily valuation, exchange of collateral and portfolio 
reconciliation should be the l ong-term goal. Most respondents do not see any particular 
market as beyond that ambition, even though sp ecific attention has to be paid to – and 
exceptions made – for (i) certai n counterparties (small), (ii) ce rtain contracts (complex), and 
(iii) certain types of collateral (non cash), where the costs of setting up daily valuation, 
exchange of collateral and reconciliation would be  disproportionate to the benefits in terms of 
risk reduction. 
Two groups of respondents have considerable c oncern with strengtheni ng bilateral collateral 
management: corporates and supranational lending institutions. Both groups are active mainly in FX derivatives, interest rate swaps and commodity derivatives. While both groups support 
the objective of making OTC derivatives safer, they argue that they adequately address the 
risks associated with their current use of OT C derivatives and that obliging them to submit 
collateral would create si gnificant risks, in terms of unpredic table margin calls, and costs, in 
terms of administering their coll ateral obligations. This would effectively reduce their ability 
to take recourse to OTC derivatives to hedge their business related risks. 
Moreover, some corporates expr ess particular concern related to the CDS market, which they 
judge opaque and volatile and where impredictabl e CDS spreads may affect corporates' access 
to credit.  
 
EN 101   EN As regards the need for legisla tion, views differ significantly. Mo st financial firms argue that, 
as current collateral levels are adequate, existin g rules and incentives are sufficient. Others – 
infrastructures, many Member States – on the cont rary argue that legislation is necessary to 
complement industry action. Most of them, howe ver, argue in favour of regulatory capital 
incentives rather than mandating either supply of  collateral or certain collateral management 
techniques per se . 
(5) How could the coverage of collatera lised credit exposures be improved?  
Many stakeholders stress that available ISDA statistics on the level of  exposures covered by 
collateral are unreliable. Between financial deal ers, some argue that collateral levels are 
sufficiently high, due to the 'natural incentive s' to supply collateral (e.g. regulatory capital 
treatment). Moreover, the less than full covera ge is explained by end- users who either cannot 
(e.g. corporates) or will not (e.g. supranatio nal lending institutions) supply collateral.  
Corporates argue that being forced to conclude  collateral agreements (CSAs) would lead to 
excessive and unpredictable margin calls, which would expose them to significant liquidity 
risk. Currently they are exposed  to counterparty risk, as no CSAs. However, this risk is 
manageable provided you choose your counterpart y carefully and use se veral counterparties. 
Liquidity risk is not, as nobody can predict how prices will evolve. An obligation to submit 
collateral would put a significant strain on co rporate liquidity and would be operationally 
costly.  
Similarly, supranational lending institutions argue that obliging them to submit collateral 
(either by means of CCP membership or in bila teral collateral relations) would significantly 
increase their cost and submit them to liquidity risk. 
In order to strengthen the level of collateral, some respondents argue th at it is necessary to 
explore the possibility of non-cash collateral. 
(6) Are there markets where daily valuation, exchange of collateral and portfolio 
reconciliation cannot be the goal? Please justify. 
A majority of stakeholders argues that there are no markets that per se cannot support daily 
valuation, exchange of collateral and portfolio reconciliation and that it should accordingly be 
a long-term goal. However, most respondents st ress the costs of daily procedures, which for 
smaller financial firms and most end-users w ould be prohibitive. Therefore, while broad 
support for strengthening bilatera l collateral management, it is necessary to make exceptions 
for (i) certain counterparties (sma ll), (ii) certain contracts (compl ex), and (iii) certain types of 
collateral (non cash), where the co sts of setting up daily valuati on, exchange of collateral and 
reconciliation would be dispr oportionate to the benefits in terms of reducing risk. 
(7) How frequently should mu ltilateral netting be used? 
There is a broad support for trade compression, th e kind of multilateral netting referred to in 
this question. However, the frequency of co mpression depends on the liquidity of underlying 
instrument; if liquid, compression could occur more frequently; if not, less. 
(8) Should bilateral collateral management be  left to self-regulatory initiatives or 
does it need to be incentivised by appropriate legislative instruments? 
 
EN 102   EN Views on the relative merits of  self-regulation vs. legislative instruments differ. Financial 
firms broadly express little support for legi slation, arguing that natural incentives push 
towards high level of collateralisation and th at existing legislation (CRD) already provide 
regulatory capital incentives. Ot hers – corporates, infrastructu res, public authorities – on the 
contrary argue that legislation is a useful and necessary complement to industry action. As 
regards the form of such legisl ation, with the exception of many infrastructure providers, there 
is limited support for mandating either collat eral provisioning or  certain collateral 
management techniques.  
Instead, legislation should focus on incentives (regulatory capital requi rements differentiated 
according to clearing method). Regulatory capit al regime should favour CCP clearing. For 
example, it is argued that regulatory capital rules on bilateral collateral should take into account whether collateralisation includes future replacement cost (initial margin) and not 
only variation margin, as is currently the no rm. Moreover, some argue that the charge on 
bilateral collateral should be reduced in st eps depending on the contract being sufficiently 
standardised, variation margin  being supplied and initial margin bein g supplied. The best 
treatment should be accorded to CCPs.  
Furthermore, those supporting ma ndating argue that risk taking (trading) should be separated 
from risk management (collateral collection) . Accordingly, collateral management should 
preferably be handled by a third party bilate ral collateral manager. A commonly held position 
is that irrespective of what is done, it is es sential that institutions remain responsible for 
properly managing their risk. Ther efore, when adapting rules, it is necessary to keep 
incentives to assess and hedge risks at institutional level. 
4. C
ENTRAL DATA REPOSITORIES  
General comments 
The idea of central data repositories or trade repositories (TR) is generally well accepted by 
all kind of respondents. Some di vergences appear on the scope of products to be covered and 
on the need of a unique TR or several ones ex clusively covering a segment of the market. 
Confidentiality and transparency  are the two main concerns to  be addressed when creating 
such TR according to an overwhelming majo rity of respondents. The disclosure of 
information to the public is positively cons idered by most of the respondents. However 
unanimously, respondents propose not to disclose to the public any information which could 
be detrimental to the market or one of its part icipants. Disclosure of aggregate data according 
to the respondents is the way to avoid this happening. Respondents also unanimously agree 
that regulatory authorities should have an ex tended access to all data with the sufficient 
granularity to allow them to exerci se their market supervisory duties. 
(9)  Are there market segments for which a cen tral data repository is not  necessary or 
desirable? 
An overwhelming majority of the answers reco gnise the need to put in place central data 
repositories for all class of assets and mark ets. However among the answers received from 
entities falling under the business category "infrastructures", ther e seems to be an unanimity 
in favour of having markets and transactions done "through CCP" not being reported to the 
TR in view of avoidi ng duplication of work. 
 
EN 103   EN There are also an important number of answer s requiring the settlement of a unique central 
data repository in order to avoid competition and unnecessary duplication. 
(10)  Which regulatory requirements should central data repositories be subject  to? 
Regarding the kind and the level of regulatory c onstraints to put in place, in general it is 
suggested to have an equal treatment between TR and other financial market players. Some 
referred explicitly to the MIFID provisions (art icle 32) whereas others referred to the legal 
framework surrounding Central Securities  Depositories (CSD) activities. 
One of the major concerns raised is the need for high level of transparency and adequate rules 
on system controls and confidentiality.  
There are an equal number of answers in fa vour of TR being public entities or privately 
owned ones. Work undertaken by IOSCO and CE SR on this matter can serve as a base 
according to one public authorities. 
(11)  What information should  be disclosed to the public? 
Regarding information disclosure a distinction is  made by all respondents : the direct and full 
access to be given to regulatory Authoritie s on the one hand and on the other hand a 
disclosure to the public of  high level statistics base d on aggregated figures.  
Regarding the scope of the data to be publis hed, most of the answers propose to cover all 
markets segments on three elements: average pr ices (intraday), volume s and open interest. 
Many respondents asked also that the disclosure  to the public take place on a delayed basis. 
One respondent explicitly quoted the work of the OTC Derivatives Regulators Forum on this 
topic which proposes to disclose  to the public 5 kind of data (all live positions as of a 
specified date; weekly activity for aggregat e positions; weekly transaction activities; 
aggregate open interest by currency and aggregate settlement data by currency). 
Disclosure to the public of information on indi vidual transaction is unanimously rejected. As 
written by a respondent the commonly accep ted goal to be achieved is that: " The public 
should be able to analyse the evo lution of the market structure over time on the basis of the 
information made available ". 
Also many respondents have concerns about the additional reporting oblig ation it will convey: 
all "corporate" respondents have indicated that these new constraints should be born 
exclusively by their financial c ounterpart and that in any case these new reporting obligations 
could not lead to an in crease of the costs of these financial entities. 
5. M OVE CLEARING OF STANDARDISED OTC DERIVATIVES TO CCP S 
General comments 
Respondents highlight a general aversion to  mandatory clearing (even exchanges and 
infrastructures are not supportive)  and suggest to follow the wa y of incentivis ing clearing 
through adequate capital incenti ve. Some indicate the work of the Basel Committee in this 
respect and the higher capital charges that shoul d apply to bilateral transactions as an 
incentive to CCP clearing. 
 
EN 104   EN Many call for regulation to define minimum st andards for CCPs, in particular on risk 
management to avoid competition to the detriment of risk, but also on CCPs governance and protection of client assets. 
Many respondents highlight the time needed to adapt their systems. 
Both banks are against multiple CCPs and some  suggests a limited number or only one CCP 
per asset class. In their view, the competition problem would be better solved by appropriate 
governance arrangements or ownership. 
In general the corporate sector is  against the idea of CCPs that would simply increase the cost 
for them. They believe that it is relevant  only for CDS and for the financial sector. 
Many point out that the FX market is different and CCPs are not needed as the main source of 
risk is the settlement risk not replacement risk  and the former is already adequately covered. 
(12) Do you agree that the eligibility of contracts should be left to CCPs? Which 
governance arrangements might be necessary for this decision to be left to the 
CCPs' risk committees? 
Almost all the respondents agree that the eligibility should be left to CCPs which are the one 
to bear the risk. Many however argue that the decision should not lead to an obligation to 
clear the product via a CCP.  
Many banks suggests that users should be appropr iately consulted and so me suggest that the 
decision of the risk committee should be binding. So me suggest also a role of the regulators in 
this respect. Many highlight the risk of CCP s that are for profit organisation. Many also 
request the respect of th e ESCB/CESR recommendations  on governance arrangements. 
For funds it is very important that  CDS contracts that exclude loan  delivery in case of a credit 
event are considered eligible. 
(13) What additional benefit should the CCP provide to secure a broader use of its 
services? 
Many agree with the suggestion of the consultation  paper that one of the benefit can certainly 
be for the CCP to act as reporting entity on be half of its members. However, a couple of 
respondents highlight that in a competitive CC P environment the information held by the 
different CCPs would be incomplete and not up to  date considering that  clearing not always 
occur on the same day. Therefore other market in frastructures would be better placed in this 
respect. 
Among the other services and benefits  suggested appear the following: 
– Broad market participation; 
– Straight Through Processing; 
– Transparency on methodologies and prices; 
– Cost reduction and adaptation of fee structure for less active customers; 
– Cross-margins; 
– Interoperability; 
– Leveraging of existing infrastructure; 
– Incorporate trade tear-up, termination or compression (even through account segregation); 
 
EN 105   EN – Equal treatment of corporate actions; 
– Tri-party repo arrangements  for collateral posted; 
– Account segregation and portability; 
– Better tax treatment of CCP  cleared transactions; 
– Use of central bank money; 
– Participation and guarantee of  States or central banks. 
 
(14) Is the zero-risk weighting a sufficientl y effective incentive for using CCPs across 
different market segments? 
In general most of the respondents believe th at the zero-risk weig hting is a sufficient 
incentive. However, some point out that to be  effective appropriate weights should be placed 
elsewhere, i.e. bilateral transactions. In this respect many call for global consistency on the incentive applied and therefore suggest leav ing this work to the Basel Committee.  
One interested party argues that since exchange traded contracts incur a minor liquidity risk, 
this should be reflected in a better capital tr eatment than CCP cleared contracts traded OTC. 
(15)  Should additional requi rements, such as appropriate account segregation, be 
introduced to apply the zero-risk weighting to indirect participants? 
Almost all respondent are in favour of accoun t segregation. Some believe that extending 
capital incentives to them is a positive tool, howe ver to do that it should be ensured that the 
only counterparty risk that the client face is th e CCP one and not that of the clearing member. 
Some suggests that a large por tion of indirect participants are not credit institution and 
therefore the zero-risk weighting does not apply. 
Some argue that since segregatio n comes at a cost it should not be imposed, in particular 
segregation at CCP level. It should be for the cu stomer to decide on the basis of a transparent 
assessment of costs and risks faced. 
Some, in particular infrastruct ures, buy-side and some public authority, call fo r appropriate 
regulation to establish harmonised rules on prot ection of client assets. It is even more 
important in considering that in teroperability will not be immediately available and access via 
clearing members may represent an interim solution. 
(16)  Should bilateral clearing  of CCP-eligible CDS be penalised and, if so, to what 
extent? Is there a need to extend regulatory  incentives to clear through a CCP to 
other derivatives products?  
In general it is suggested that the same approa ch should apply to the different asset classes, 
but most of the respondent ar e against punitive charges. Cap ital requirements should reflect 
the effective risk faced and not be improperly used. However, bilateral clearing implies higher 
risks and these should be duly taken into account and by doing so an incentive to CCP 
clearing will be provided. Some market participants may have  valid reasons not to clear 
through CCP and only the higher risk of  that choice should be captured.  
Capital charges are generally preferred to mandato ry use of a particular infrastructure. Some 
respondents from the buy-side, from infrastructures or from the public sector believe that it is 
not unreasonable to penalise bilateral clearing of CCP-eligible contracts. Buy-side firms are, 
however, against penalisation for de cisions outside their control.  
 
EN 106   EN (17) Under which conditions should ex emptions be granted and by whom? 
The majority of those who replied to this question indicated that CCP use should not be 
mandated and hence no exemptions are needed. Corporates unanimously replied that they 
should be exempt from using CCPs. Some of the respondents indicated that CCP clearing 
should be mandated only for entities with suffici ently large exposures and for entities that are 
systemically important. In these cases the ex emptions should be granted by the relevant 
authorities (in some cases after discussions with the industry). 
(18) What is the minimum acceptable ratio of CCP cleared/eligible contract? What is 
the maximum acceptable number of non-eligible contracts? 
Almost all of the respondents who replied to this question indicated  that it is not  advisable to 
set arbitrary thresholds. Those who did provide some indications  of what these thresholds 
could be, pointed out that they would differ acco rding to product types; in such cases best-
practice benchmarks should be used. CCPs warn ed that setting the maximum number of non-
eligible contracts could be c ounterproductive, as CCPs could be  forced to clear unsuitable 
contracts to keep their members below the threshold. 
(19) What statistics need to be provided to  regulators to make sure they have all the 
information necessary to perform their duties? 
In general, the respondents i ndicated that regulators should receive all the information 
necessary to perform their dutie s. A number of respondents have  stressed the im portant role 
that trade repositories could pl ay in the provision of inform ation to regulators (some have 
even indicated that the repositories should be th e default exit point for all information). Some 
have also pointed out to the current work being done within the OTC Derivatives Regulators 
Forum for determining what type of inform ation regulators would like to have. One 
respondent highlighted the need for comparable  statistics between data provided by CCPs and 
data provided by repositories. A few corporat es asked to be exempt from any reporting 
requirements to regulators. 
(20) How could European legislation help  ensuring safety, soundness and a level 
playing field between CCPs? 
The great majority of respondent s indicated that some sort of  legislation is necessary to 
regulate the activity of CCPs (a  few indicated that the ES CB-CESR recommendations should 
be used as the basis for such legislation). Th e main reasons for legisl ation mentioned included 
ensuring safety and soundness of CCPs, a level playing field and preventing competition between CCPs on margin (and thus a race to the bottom). To this end, the respondents indicated that legislation should cover, inter alia, open and fair acces s, business continuity, 
effective risk management (especially concer ning default management process: mandatory 
periodic fire drills and stress testing of the default fund), segr egation of client assets, common 
authorisation regime (on this a few respondents indicated that th is could be done by one of the 
new European authorities) and passporting. 
Some respondents indicated either that th e recently adopted ESCB-CESR recommendations 
for CCPs are sufficient or that one should wait and see if th ese recommendations will work 
before considering legislation. Some respondent s also stressed the importance of developing 
international standards. 
 
EN 107   EN A few respondents also stressed the importance of granting CCPs access to central bank 
liquidity in times of markets stress. In this context some have argued that CCPs should be 
located in the area of the currency in which derivatives are denominated and should have the 
status of credit institutions. One respondent called for explicit public guarantees for CCPs. 
6. T RANSPARENCY OF TRADING  
General comments 
Extending MiFID style transpar ency on OTC derivatives market is facing opposition from a 
large majority of the stakeholders that have  responded to the consultation. The professional 
nature of the market participants, the size  of the trades, the existing arrangements and 
presence of data providers, and the diversity of derivatives markets lead the majority of 
stakeholders to reject uniform extension of MiFI D style transparency rules, especially for pre-
trade information and for specific markets like interest rate, foreign exchange and commodities markets, saying that it would damage liquidity. 
Transaction and position reporting finds much mo re support from stakeholders, especially 
position reporting towards regulators. They consider that TRs and CCPs are the best positioned to fulfil such requirements. They also underline the need to minimize as much as possible the cost and burden of the new reporting and to preserve confidentiality on individual 
transaction from public scrutiny, as well as the fr agmentation of data that may result from it. 
 (21) Should MiFID-type pre and post trade transparency rules be extended to non-
equities products? Are there othe r means to ensure transparency? 
Even if a few of respondents agree in principl e on increased transparency, a large majority of 
them consider that MiFID type transparency rule s, especially pre-trade, are less relevant for 
derivatives because of the specificities of thes e markets. Market participants are professional 
investors, transactions large in size and data  providers are actively operating. Most market 
participants which have answere d, being financials or corporates  consider that the level of 
transparency on these markets is overall satis factory.  Most corporates estimate that 
transparency on foreign exchange, interest rate s and commodities markets is adequate. On the 
contrary, a couple of respondents mention the lack of transparen cy of the CDS market. Lastly, 
there are some comments on the fact that  increased transparency without further 
standardisation would create confusion. 
Several respondents across different  categories underline that incr eased transparency could be 
detrimental to liquidity, that any new transp arency measure should go through a thorough 
costs/benefits analysis and adapted to each segment of the OTC derivatives markets which 
encompass very different pr oducts and trading features. 
(22) How should transactions reporting of  OTC derivatives to competent authorities 
be envisaged? Should it be extended to all contracts or to certain categories? If 
so, which ones? Are there other means to ensure that the comp etent authorities 
receive the relevant information on  OTC derivatives transactions? 
A majority of respondents are supportive of  transaction reporting towards competent 
authorities. They also consider that the report ing to competent authorities should come from 
CCPs or TRs and to a less exte nt, sell side institutions. 
 
EN 108   EN Several respondents, especially from the corpor ate side and more particularly in the energy 
markets, stress the necessity of preserving conf identiality of individual transactions towards 
the public in order to preserve  sensitive commercial informa tion and avoid damaging market 
liquidity. A few point out the fact  that transaction reporting may not be the most suitable tool 
for regulators, especially for energy markets. 
There were also several comments on the needs to avoid duplication of existing data and too 
heavy administrative burden. 
(23) How should position reporting of derivatives to competent authorities be 
envisaged? Should it be extended to all contracts or to certain categories? If so, which ones? Are there other means to ensure that the competent authorities 
receive the relevant information on the exposures to particular contracts? 
There is a large support for position reporting, on a post trade basis, with the same restriction 
than for transaction reporting regarding public  release of individual positions. TR and CCPs 
are mentioned as the most suitable sources of data. 
There were also individual comments on the needs for comparable data across Europe, for 
clear and unique identification of each trans action, and on the necessity to avoid complexity 
and minimize costs. A couple of respondents me ntioned TREM as a blue print for this 
position reporting. 
7. M
OVE TRADING TO MORE PUBLIC TRADING VENUES  
General comments 
Trading on public trading venues, it is seen as complementary to OTC trading because of the 
necessity to be able to trade customised pr oducts, to use voice market when needed and  
choose between competing trading venues. A major ity of stakeholders consider that forcing 
all derivatives trading to public  venues would have limited a dded value if ce ntral depositary 
and CCP clearing are implemented but could dama ge liquidity for some markets. A natural 
evolution should be favoured ove r a mandatory approach.   
(24) How can further trade flow be channelle d through transparent and efficient trading 
venues? What would be the appropriate leve l of transparency (price, transaction, 
position) for the differe nt derivatives markets?  
The majority of respondents do not support the tr ansfer, especially mandatory of derivatives 
trading to public trading venue s. For several respondents, trad ing on public venues would not 
add value if sufficient standard isation, TR and CCP clearing is  achieved, but would create a 
number of issues regarding the ability to trade for large size, confidentiality, and the 
possibility of using voice trading rather  then electronic trading when needed. 
For several respondents, OTC a nd public trading venues are said  to be complementary and 
competition between trading venues is welcome and should be maintained. 
 
 
EN 109   EN ANNEX 5: Summary of second public consultation 
I. Clearing and risk miti gation of OTC derivatives 
Questions:  
What are stakeholders' views on the clearing  obligation, the process to determine the 
eligibility of OTC derivate contracts for manda tory clearing, and its application? Do 
stakeholders agree that access from trading venues to CCPs clearing eligible contracts 
should be guaranteed?  
The spectrum of the answers ranged from genera l and strong support for the introduction of a 
clearing obligation (mostly voiced by market in frastructures) to an outright opposition to the 
concept as such (expressed by some banks and dealers). It also included responses that 
approved the principle of mandatory clearing while  raising concerns about the ability of some 
parts of the industry to adapt smoothl y and timely to the consequences.  
Regarding the process, views were expr essed both on the bottom-up and the top-down 
approach to determine the eligibility of OT C derivative contracts for mandatory clearing. 
Some respondents raised concerns that a bottom-up approach might  incentivise markets 
infrastructures to apply for mandatory clearing out  of commercial interests. As concerns the 
top-down approach, some respondents expressed c oncerns if this include d the possibility of 
forcing CCPs to clear contracts th ey do not want to clear. The question of the enforceability of 
the clearing obligation wa s raised by some market infrastructu res, i.e. if the non-respect of the 
obligation to clear would entail the invalidity of  the contract and if there were appropriate 
sanctions in place. 
On the issue of application of the obligatio n, views ranged from an all encompassing 
approach in terms of personal and material scope  to a limited applicability of the clearing 
obligation. Respondents who argued in the latter sense cited some types of contracts and 
institutions that should be regarded as being less of a source for systemic risks than others. 
As regards the access of all relevant tradin g venues to CCPs, a ma jority of respondents 
expressed support for a guaranteed access.  Vi ews differed among market infrastructures, 
where some argued that trading platforms should comply with operational and risk 
requirements established by CCPs.  
Question:  
Do stakeholders share the general approach set out above on the application of the clearing 
obligation to non-financial counterpa rties that meet certain thresholds? 
Representative from buy-side institutions expressed a broad support for the thresholds in 
principle, while voicing some c oncerns about possible loopholes.  
A large majority of banks, dealers and non-fina ncial undertakings believed that non-financial 
counterparties should not under any circumstan ces be covered by the clearing obligation. 
Instead of the concept of a "hard" clearing threshold, ma ny non-financial undertakings would 
opt for a flexible approach which encomp assed a number of qualitative criteria. 
While largely recognizing the usefulness of an information threshold, some respondents 
called for clear and appropriate definitions, es p. related to the base of the threshold.  
 
EN 110   EN Question:  
Do stakeholders share the principle and requirements set out above on the risk mitigation 
techniques for bilateral OTC derivative contracts?  
In terms of the provisions re lated to risk mitig ation of non-cleared contracts, larger 
counterparties expressed in ge neral broad support for such m easures. There was less approval 
from smaller firms. All counterparties did not consider that there should be a mandatory 
collateralisation of bilateral exposures.  
II. Requirements for Central Counterparties 
Questions:  
Do stakeholders share the general approach set out above on organisational requirements 
for CCPs? In particular comments are sought on the role and function of the Risk 
Committee; whether the governance arrangem ents and the specific requirements are 
sufficient to prevent and manage potential conflicts of interest; stringent outsourcing 
requirements; and participation and transparency requirements?  
Do stakeholders consider that possible conflicts  of interests would justify specific rules on 
the ownership of CCPs? If so, which kind of rules?  
1. Organisational requirements 
There was general support for the requirements indicated in the consultation document. Some 
respondents argued for CCPs having dedicated CCP  status, while others would favour a bank 
status.  
2. Risk committee There was wide agreement on the necessity to ha ve a risk committee. Views diverged as to 
the role and concrete set up of the committee.  While most banks and dealers argued for a 
decision making role of this body, some Member  States expressed clear preference for a 
strictly advisory role. Some respondents que stioned the usefulness of having independent 
administrators whose incentives were not clear. Buy-side institutions stressed the need for end-users to be represented on the risk comm ittee and called for a mediation mechanism if 
there was a disagreement between the risk committee and the CCP management. Many banks 
and dealers believed that the risk committe e should be involved in providing views on 
interoperability arrangements. 
3. Conflicts of interest Respondents expressed general sup port for clear rules on conflicts of interest. Some market 
infrastructures voiced concern over an extension of the relevant provisions to clients of 
clearing members with whom CCPs  have no direct relationship. 
4. Outsourcing This point was addressed in pa rticular by Member States, mark et infrastructures, banks and 
dealers. There was a broad agreement to limit outsourcing, esp. regarding risk management functions. 
 
EN 111   EN 5. Participation requirements 
Respondents supported the need for stringent pa rticipation requirements. Smaller financial 
institutions stressed that access should be open and non-discriminatory and cautioned against 
putting in place requirements that were too hi gh for smaller players to meet. Non-financial 
undertakings emphasized the need to be able to become clearing members should they fall 
under the clearing obligation. On the issue of in forming CCPs about client relationships, most 
financial institutions were critical of passi ng information on. On the other hand, market 
infrastructures expressed the need for this in formation, while cautioning against a shift in the 
burden of measuring the risk emerging from indirect participation to CCPs. 
6. Transparency In general, there is broad support for strong tran sparency requirements. Market infrastructures 
recommended some modifications as to the ex act formulation on disclosure requirements. 
Questions:  
Do stakeholders share the approach set out above on segregation and portability?  
7. Segregation and portability 
There was strong support for the general principl e, with some respondents suggesting a more 
detailed legislative text as to the scope of segregation. So me expressed concerns about 
imposing a prescriptive structure, but rather to provide choice. Many responses called for an 
explicit override of national inso lvency and bankruptcy laws.  
Questions:  
Do stakeholders share the general approach set out above on prudential requirements for 
CCPs? In particular: what should be the adequa te level of initial capital? Are exposures of 
CCPs appropriately measured and managed? Should the default fund be mandatory and 
what risks should it cover? Should the rank of the different lines of defence of a CCP be 
specified? Will the collateral requirements and investment policy ensure that CCPs will not 
be exposed to external risks?  Will the provisions ensure the correct management of a default 
situation? Are the provisions above sufficient to ensure access to central bank liquidity 
without compromising central banks' independence? 
8. Prudential requirements 
Apart from market infrastructures, most respondents limited their comments to general 
statements on the desirability of prudential requirements. There was widespread agreement 
among respondents on sound and coherent prudential requirements for CCPs which should prevent CCPs from competing by lowe ring risk management standards.  
A. Initial capital Some market infrastructures called for a clearer distinct ion between initial and ongoing 
capital, favouring the referen ce to "minimum" capital rather  than "initial" capital. 
Some respondents saw the adequate level of in itial capital by 5 million Euros, while others 
would prefer the capital to be a certai n multiple of months of running costs. 
 
EN 112   EN B. Exposure management 
A number of Member States would opt for an in creased focus on liquidity risk rather than on 
credit risk.  
C. Margin requirements Some non-financial counterparti es cautioned against a requir ement to post margins on an 
intraday basis as they did not have direct access to central bank liquidity. On the part of 
market infrastructures, some voiced c oncerns on the protection of margins. 
D. Default fund There was widespread support for a mandatory  default fund. Some respondents called for 
clearer definitions on the make -up, the functioning and the coverage of such a fund.  
E. Other risk controls Market infrastructures regarded some of the prop osed requirements as be ing overly strict, e.g. 
the requirement to withstand the default of the three largest clearing members and the limitation of credit lines per clearing member to 10 %. 
F. Default waterfall Market infrastructures expre ssed diverging views on the set- up and operation of a default 
waterfall. Some believed that cap ital should not be part of the default waterfall, but only the 
last line of defence.  
G. Collateral requirements Market infrastructures displayed broad ag reement with the suggested solution. Some 
suggested to better specify the process for determining adequate haircuts. Non-financial 
undertakings called for the inclusion of bank guarantees and credit lines as highly liquid 
collateral. 
H. Investment policy A number of market infrastructures raised concerns about the requirement to deposit 
securities with securitie s settlement systems and cash with central banks. Buy-side institutions 
expressed a general support for the requirement that investments of CCPs should be made in 
safe and highly liquid assets, but cautioned against penalising funds with long-term 
investment strategies. 
I. Default procedures Banks and dealers generally poin ted out that members' liability  vis-à-vis a CCP should not be 
unlimited. Some market infrastructures pointed out that it should be made clear that the law of 
the CCP should govern any default procedure.  
J. Review of models, stre ss testing and back testing 
 
EN 113   EN Market infrastructures were supportive of the ge neral thrust of the pr ocess while questioning 
the adequacy of some of the procedural steps proposed. 
K. Settlement risk There were no particular co mments made by respondents. 
Questions:  
Do stakeholders share the general approach set out above on the recognition of third 
country CCPs? Are the suggested criteria su fficient? Do stakeholders consider that 
additional criteria should be considered?  
Do stakeholders agree with the extension of th e clearing obligation to contracts cleared by 
third country CCPs to ensure global consistency? 
9. Relations with third countries 
The majority of respondents favoured an equiva lence based approach. A few Member States 
showed support for a location-based approach. A number of comments called for the respect 
of EU data protection and confidentiality standards. 
III. Interoperability 
Question:  
Stakeholders' views are welcomed on the gen eral approach set out above on interoperability 
and the principles and requirements on managing risks and approval.  
1. Interoperability 
There were diverging views both on the desirability  of interoperability in general and on the 
concrete scope and operation of interoperability in par ticular. While some respondents 
supported the principle of interoperability, others called it premature or overly risky 
considering the current state of play of legal and operational harmonisation.  
Regarding the scope, a number of respondents intended to limit interoperability to cash 
securities or even cash equities.  
As far as the process is concerned, some suggested a validity check by the competent 
authorities of the denial of access. 
2. Managing risks arising from an  interoperability arrangement 
There was a broad support for strict risk cont rols. Some respondents called for a harmonised 
regulatory framework to ensure proper risk mana gement of a link and to ensure transparency 
to users.  
3. Approval of interopera bility arrangements 
A number of respondents expressed support for prior approval by comp etent authorities of 
interoperability arrangements. 
 
EN 114   EN  
 
IV. Reporting obligation and requi rements for trade repositories 
Questions:  
What are stakeholders' preferred options on th e reporting obligation and on how to ensure 
regulators' access to information with trade repositories? Please explain. 
1. Reporting obligation 
Preference for the various options differed amo ng stakeholders. A majority of Member States 
and non-financial undertakings favoured option A, while a majority of banks and dealers 
would support option B. Buy-side institutions  expressed preference for option A, provided 
that reporting obligations would be fulfilled by dealers. A number of respondents pointed out the need for a consistent approach  with the reporting system that is to be set up for the trading 
of energy contracts. 
2. Requirement for Registra tion of a Trade Repository 
A majority of Member States as well as banks and dealers supported option 2. 
Questions:  
Do stakeholders share the general approach set out above on the requirements for trade 
repositories? In particular, are the specifi c requirements on operational reliability, 
safeguarding and recording and transparency and data availability sufficient to ensure 
the adequate function of trade repositories  and the adequate protection of the data 
recorded?  
Requirements for trade repositories 
A number of respondents expressed broad support  for stringent and coherent requirements for 
trade repositories. It was often stressed that th e confidentiality of data in trade repositories had 
to be ensured. Reference was also made to the issue of confidentiality clauses of reporting institutions and the need of future legi slation to deal appropriately with them. 
V. Technical reference glossary of definitions 
Questions:  
Do stakeholders agree with the definitions set out above? 
Some respondents suggested clea rer definitions on certain term s, e.g. "end-user corporates" 
and "financial counterparty". 
 
EN 115   EN ANNEX 6: An overview of derivatives 
 
Derivatives owe their name to the fact that thei r value is derived from an underlying, such as 
the price of a financial instrument (e.g. a share of a publicly traded co mpany) or a commodity 
(e.g. oil), a market variable (e.g. a stock index or an interest rate), the occurrence of an event 
(e.g. a default) or something else (e.g. weather conditions). 
Derivatives are used by a wide variety of companies. Accordi ng to a survey conducted by the 
International Swaps and Deri vatives Association (ISDA),170 94% of the world’s 500 largest 
companies ranked by revenue use derivatives to manage and hedge their business and 
financial risks. The most used types of derivatives are forei gn exchange derivatives (88%), 
closely followed by interest rate derivatives (83%). 
An important characteristic of derivatives is th eir ability to provide le verage, i.e. they allow 
investors to take a large position in the market while committing only a small amount of capital. This makes hedging, but al so speculating, cheaper . In other words, leverage allows an 
investor to earn a higher rate of return on thei r capital if the underlying moves in the direction 
that, for example, the buyer of  the derivative anticipated.
171 Unfortunately, the converse is 
also true: a party to the cont ract can suffer large losses in case the underlying moves in the 
wrong direction. 
The fact that derivatives are contracts provides them with a further important characteristic: 
flexibility. Indeed, derivatives can range from t hose (e.g. futures) that ha ve fully standardised 
parameters, such as notional value or maturity, to those (e.g. swap s) that are fully tailored to 
the specific needs of a particular user. The type  of derivative usually also determines how a 
derivative is traded: fully standardised deriva tives are typically trad ed on organised trading 
venues, i.e. derivatives exchanges, while cu stomised (or bespoke) de rivatives are traded 
bilaterally, i.e. off-exchange or, as commonly called, over-th e-counter (OTC). 
The most common types of derivatives traded  on an exchange are futures and options. 
Trading on exchanges is, in principle, accessible to  everyone (either directly or indirectly), 
although in practice only a very small portion of the trading volume in some types of 
derivatives (most notably single equity options ) is due to retail investors. This wide 
accessibility is one of the main reasons why ex changes are tightly regulated. While there are 
numerous derivatives exchanges out there, trading in a particular type of derivative tends to be 
concentrated on one venue. Last, but certainly not  least, a derivatives exchange is usually 
served by a central counterparty,172 which guarantees the trades executed on the exchange, 
nets down mutually offsetting contracts an d ensures that exposures are sufficiently 
collateralised. 
The most common types of OTC derivatives are swaps, forwards and (exotic) options. Unlike 
exchange-traded derivatives, OTC derivatives ar e reserved to professional investors and are 
thus not accessible to the genera l public. This is why the OTC derivatives market is subject to 
                                                 
170  2009 ISDA Derivatives Usage Surv ey. The document is available at  
http://www.isda.org/res earchnotes/pdf/ISDA-Re search-Notes2.pdf. 
171  The higher return does not, howeve r, come for free: it is the direct cons equence of the higher risk that the 
investor takes on. 
172  In the vast majority of cases the CCP is owned by the exchange that it serves. 
 
EN 116   EN much lighter regulation.173 The bilateral nature of this mark et makes it rather opaque to parties 
outside a particular transacti on. In spite of its bilateral na ture, which would lead one to 
presume a wide dispersion of trading, many se gments of the OTC derivatives market are 
actually highly concentrated, with a large sh are of the trading being done by a handful of 
major dealers. Unlike in the case of derivatives  exchanges, the use of CCPs is far less 
pervasive in the OTC derivatives market.174 This lack of a CCP is, to a certain extent, 
compensated by alternative arrangements: the e xposures related to the contracts are secured 
through bilateral collateral arrangements175 and mutually offsetting trades are terminated 
through a process called portfolio compression. The bilateral nature of the market and the fact 
that practically all major financial institutions are participants in this market has lead to a high 
level of interconnection between these institutions and hence a high level of interdependence 
amongst them. 
 
                                                 
173  The basic premise behind this lighter treatment has always been that professional investors can take care of 
themselves. 
174  Prior to the launch of CCPs for CDS, the only mark et segment where CCP-cleared trades represented a 
significant portion of the market was the interest rate swaps segment. CCPs also clear OTC equity and 
commodity derivatives (e.g. oil), but to a far lesser extent. 
175  Whereas a CCP requires the posting of both initial and variation margin, OTC derivatives trades usually 
require only the posting of variation margin. This does  not mean that there are no cases where initial and 
variation margin are required on a regular basis. For example, prime brokers require both to be posted by 
hedge funds they serve. The practice of not requiring any collateral is, however, not uncommon. For 
example, OTC derivatives where one of the counterpa rties is a non-financial company or a government 
usually do not involve the exchange of collateral, mainly because they do not wish to provide the collateral 
(e.g. because they have a high credit rating and therefore consider themselves to be sufficiently 
creditworthy not to have to provide collateral). 
 
EN 117   EN  
 
EN 118   EN ANNEX 7:  
 
One way to estimate the economic impact of OTC de rivatives on the financia l crisis is to look 
at the economic costs of the financial crisis first. The costs of a financial crisis are typically measured by evaluating the fiscal costs or th e costs of lost output. Ex isting literature on the 
subject suggests that past  crises resulted in large costs on both measures.
176  
On quantifying the fiscal costs, the narrowest measure one could look at is the amount of 
public funds (that is ta xpayers' money) used to support th e banking sector. As Table 1 shows, 
by the end of 2009 a total of €226 billion (1.9% of  EU GDP) of public funds were disbursed 
in the form of capital injections used to eith er prop-up ailing banks or to bail out insolvent 
ones. Furthermore, over €1 trillion contingent liabilities have been cr eated through measures 
such as guarantees on bank liabilities, impa ired asset relief and liquidity support. 
Table 1: Total size of EU public interventions in the banking sector (as of 31 December 2009) 
 € billion % of GDP 
Total approved measures 393.0 3.3 Capital injections Effective capital injections  226.5 1.9 
Total approved measures 2895.1 24.5 Guarantees on 
bank liabilities Guarantees granted 916.4 7.7 
Total approved measures 329.3 2.8 Relief of impaired 
asset Effective asset relief  329.3 2.8 
Total approved measures 123.2 1.0 Liquidity and bank 
funding support Effective liquidity interventions  66.8 0.6 
Total for all approved measures 3740.6 31.6 
Total effective for all measures 1539.1 13.0 
Source: European Commission 
While these direct fiscal costs are by no means trivial, they are but a fraction of the overall 
costs of the crisis. The bulk of the costs are those related to the economic recession that is 
usually triggered by the crisis and that manifest themselves in the form of loss of output, 
increase of unemployment and public debt. As can  be seen from Table 2, the current crisis 
fully complies with this pattern. Since th e beginning of the cr isis, all the major 
macroeconomic indicators registered a significan t deterioration, most notably those on public 
finances. The table reports the EU average and as all averages, this one too masks national 
realities which are substantially worse. 
Table 2: The effects of the fina ncial crisis on the EU economy 
 Real GDP 
growth 
(%) Cumulative 
output gap 
(€ billion)1,2 Government 
debt 
(% of GDP) Government 
balance 
(% of GDP) Unemployment 
rate 
(%, December 
average) 
2007 2.9 0 58.8 -0.8 6.9 
                                                 
176  See Reinhart, C. M. and K. Rogoff (2009), "This Ti me is Different: Eight Centuries of Financial Folly", 
Princeton University Press, for a detailed historical overview. 
 
EN 119   EN 2008 0.7 -134 61.6 -2.3 7.6 
2009 -4.2 -802 73.6 -6.8 9.4 
20103 1.0 -921 79.6 -7.2 9.64 
Notes:  1 The gap is calculated assuming an annual potential gr owth rate of real GDP of 2% in the period 2008-2010. 
 2  The values are expressed at  constant, year 2000 prices. 
 3 Commission Spring 2010 forecast,177 unless stated otherwise. 
 4 Average rate of unemployment for February 2010. 
Source: Eurostat, European Commission,  Commission services calculations 
Recent studies suggest that the output losses asso ciated with financial crises were generally 
not recovered.178 There is also a possibility that this late st financial crisis had an effect on the 
potential growth rate of the EU economy, namely that it reduced it. If th at turns out to be the 
case, the losses associated with the crisis woul d be even higher than the ones estimated above. 
As indicated in this report, OTC derivative have played a role in  the financial crisis. As such, 
at least part of the costs of the crisis can be  attributed to them. Even a very conservative 
assumption on the share of the costs (i.e. 1%) mean s that more than €10 billion of costs can be 
attributed to OTC derivatives. 
                                                 
177  http://ec.europa.eu/economy_f inance/publications/european_e conomy/2010/pdf/ee-2010-2_en.pdf. 
178  See Cerra, V. and S.C. Saxena (2008), "Growth dynamics: the myth of economic recovery", American 
Economic Review 98, 439-457. 
 
EN 120   EN  
ANNEX 8: An overview of CCPs in the EU 
 
Member State  CCP  Instruments and products cleared  
Austria  Central 
CounterpartyAustria 
GmbH (CCP.A) Equities, bonds, funds, warrants, on-exchange derivatives 
(equity) 
Belgium  LCH.Clearnet S.A.  See France  
Denmark  NASDAQ OMX 
Stockholm AB See Sweden 
 EMCF See Netherlands 
Finland  NASDAQ OMX 
Stockholm AB See Sweden  
 EMCF See Netherlands 
France  LCH.Clearnet S.A.  Equities, bonds, repos, on-exchange (c ommodity, equity, FX) 
and OTC derivatives (commodity, credit, interest rate) 
Germany  EUREX Clearing AG  
 Equities, bonds, repos, funds, on-exchange derivatives 
(commodity, equity) 
 European Commodity 
Clearing AG Commodities (energy), on-exchange and OTC derivatives 
(commodity) 
Greece  ATHEXClear On-exchange de rivatives (equity, interest rate) 
Hungary  KELER Equities, bonds, funds, on-exchange derivatives (commodity, 
equity, FX, interest rate)  
Ireland EUREX Clearing AG Equities, funds  
Italy  Cassa di Compensazione 
e Garanzia (CC&G)  Equities, bonds, funds, repos, wa rrants, on-exchange derivatives 
(commodity, equity) 
Netherlands  LCH.Clearnet S.A. See France  
 EMCF Equities 
Portugal  LCH.Clearnet S.A. See France  
Romania Casa de Compensare 
Bucuresti SA On-exchange derivatives (equity, FX) 
 Casa Romana de 
Compensatie SA On-exchange derivatives (commodity, equity, FX) 
Spain  MEFF Repos, on-exchange derivatives (equity) 
 OMIClear On-exchange and OTC commodity  (energy) derivatives 
Sweden  NASDAQ OMX 
Stockholm AB On-exchange (commodity, equity, interest rate) and OTC 
derivatives 
 EMCF See Netherlands 
United 
Kingdom  LCH.Clearnet Ltd Equities, bonds, repos, on-exchange (interest rate, commodity, 
equity, FX) and OTC derivatives (commodity, interest rate)  
 EuroCCP Equities 
 ICE Clear Europe On-exchange derivatives (commodity) and OTC derivatives 
(commodity, credit) 
Norway Oslo Clearing Equities, equity derivatives (on-exchange and OTC) and 
 
EN 121   EN securities lending products. 
 NOS Clearing ASA Commodities, on-exchange and OTC commodity derivatives