Commission staff working paper - Consultation document : possible initiatives to enhance the resilience of OTC Derivatives Markets {COM(2009) 332 final} {SEC(2009) 905 final}
Date: 2009-07-03
Institutions: European Commission
Subjects: EU Member State, credit institution, economic recession, exchange of information, financing policy, impact study, supplies contract

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 3.7.2009 
SEC(2009) 914 final 

COMMISSION STAFF WORKING PAPER 

Consultation Document:  
Possible initiatives to enhance the resilience of OTC Derivatives Markets  

{COM(2009) 332 final} 
{SEC(2009) 905 final} 

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INTRODUCTION 

1. 
The  Commission's  Communication1  on  ensuring  the  efficiency,  safety  and  soundness  of 
derivatives  markets  (herein  after  the  Commission  Communication)  and  the  accompanying 
Staff  Working  Paper2  (herein  after  the  Staff  Working  Paper)  concluded  that  the  way 
derivatives markets work needs to be improved in order to safeguard financial stability. 

Overall,  the  end-goal  of  financial  stability  can  be  achieved  by  targeting  two  intermediate 
objectives, namely by (i) strengthening counterparty credit risk mitigation and (ii) increasing 
transparency. In order to achieve these objectives, a number of tools are available that can be 
applied depending on each market segment's level of maturity: 

(1) 

(2) 

(3) 

promoting further standardisation; 

strengthening the bilateral collateral management for non-CCP eligible contracts 

enhancing the use of central data repositories;  

(4)  moving clearing of standardised OTC derivatives to CCPs;  

increasing transparency of prices, transactions and positions; and 

(5) 
(6)  moving (part or all of) trading to public trading venues3. 

While  the  Communication  briefly  outlined  the  main  rationale  for  each  tool  as  well  as  the 
general issues that will guide the consultation, this paper provides a more detailed outline of 
each of the tools as well as detailed questions to stakeholders. In this context it has to be noted 
that  the  Basel  Committee  on  Banking  Supervision  is  currently  reviewing  the  treatment  of 
counterparty credit risk, which might have an impact on several issues touched upon in this 
document and might result in further actions of the Commission in this field. 

This  consultation  is  open  till  31  August  2009.  Responses  can  be  addressed  to  markt-g2-
consultations@ec.europa.eu. The Commission services will publish all responses received on 
the Commission website unless confidentiality is specifically requested. 

The  issues  addressed  in  this  document  will  also  be  discussed  at  a  high-level  conference  in 
Brussels, on 25 September. 

2. 

PROMOTING FURTHER STANDARDISATION 

Standardisation  has  two  dimensions:  standardisation  of  the  contractual  parameters  and 
standardisation of the contracts themselves to support market infrastructure. The nature of the 
OTC market so to be tailored made to fit the exact risk faced by users is not compromised by 
a contractual standardisation that facilitate the use of electronic means4. On the other end, if 
the parameters of the contracts are standardised (e.g. coupons, strike prices, maturities, etc.), 
the flexibility toward users' need may be impacted.  

By  facilitating  automatic  processing,  standardisation  would  increase  efficiency  and  reduce 
operational risks by e.g. encouraging electronic affirmation and confirmation services, central 

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C(2009) XXX final 
SEC(2009) XXX final 
The term "public trading venues" generally refers to regulated markets and multilateral trading facilities 
subject to public disclosure requirements. 
Interest  Rates  Swaps  and  Credit  Default  Swaps  represents  good  examples  where  electronic  systems 
have  been  developed  to  reduce  the  operational  risks  in  these  markets,  without  impacting  on  the 
contracts flexibility. 

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storage,  automation  of  payments  and  collateral  management  processes.  In  this  regard, 
standardisation  is  a  necessary  prerequisite  for  the  other  policy  options.  However, 
standardisation  requires  costly  investments  and,  therefore,  additional  measures  might  be 
considered  necessary  to  provide  the  adequate  incentives  to  promote  it,  in  the  spirit  of  G20 
declaration5.  

Depending  on  the  level  of  standardisation  and  on  the  risk  mitigation  tools  employed,  the 
operational  risks  a  market  participant  faces  might  be  higher  or  lower.  More  specifically,  a 
contract, which is electronically affirmed, confirmed, recorded in a central data repository and 
where  payments  arising  from  it  are  settled  in  an  automated  manner,  incurs  less  operational 
risks than a contract that does not employ these systems.  

Operational risks are specifically dealt with in the Capital Requirements Directive (CRD) and 
they also include legal risks, which may e.g. arise in case of disputes toward the terms of a 
contract if electronic systems are not used. Considerations might be given on whether specific 
requirements pertaining to operational risk provide adequate incentives toward standardisation 
of  contracts  and  use  of  market  infrastructures  (e.g.  use  of  electronic  systems  and  central 
repositories). 

Questions 

(1)  What  would  be  a  valid  reason  not  to  use  electronic  means  as  a  tool  for  contracts 

standardisation?  

(2) 

Should  contracts  standardisation  be  measured  by  the  level  of  process  automation? 
What other indicators can be used? 

(3) 

Should non-standardised contracts face higher capital charges for operational risk?  

(4)  What other incentives toward standardisation could be used, especially for non-credit 

institutions? 

3. 

STRENGTHENING BILATERAL COLLATERAL MANAGEMENT FOR NON-CCP ELIGIBLE 
OTC DERIVATIVES 

For those OTC derivative contracts that remain beyond the reach of CCP clearing irrespective 
of  further  standardisation,  it  is  important  to  strengthen  the  bilateral  clearing  model.  The 
following actions might be foreseen: 

•  Improve  timeliness:  ensure  more  timely  mark-to-market  of  positions  (daily  valuation 

should be the end goal); 

•  Improve  coverage:  the  share  of  credit  exposure  covered  by  collateral  has  stagnated  in 
recent years. According to the latest issue of the ISDA Margin Survey6, one third of overall 
credit exposures remain uncollateralized. Improve the coverage rate by encouraging market 
participants  to  enter  into  appropriate  collateral  arrangements  and  by  encouraging  second 
tier institutions and non-financial firms to provide collateral. 

•  Strengthen  the  collateral  management  process,  by  further  promoting  more  frequent 
portfolio reconciliation (possibly on a multilateral basis) and ensure more timely exchange 
of collateral (daily portfolio reconciliation and daily exchange of collateral should be the 
goal).  

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G20  (2009).  Declaration  on  strengthening  the  financial  system  –  London  summit,  2  April  2009, 
http://www.londonsummit.gov.uk/resources/en/PDF/annex-strengthening-fin-sysm 
ISDA (2009b). Margin Survey 2009, http://www.isda.org/c_and_a/pdf/ISDA-Margin-Survey-2009.pdf 

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•  Reduce  the  size  of  outstanding  derivatives  positions  and  facilitate  the  management  of  a 
potential default by promoting increased recourse to multilateral portfolio compression (i.e. 
multilateral netting of positions). This would also increase the operational efficiency (less 
contracts to process) even in a CCP environment.  

Questions 

(5) 

(6) 

(7) 

(8) 

How could the coverage of collateralised credit exposures be improved?  

Are  there  markets  where  daily  valuation,  exchange  of  collateral  and  portfolio 
reconciliation cannot be the goal? Please justify. 

How frequently should multilateral netting be used? 

Should bilateral collateral management be left to self-regulatory initiatives or does it 
need to be incentivised by appropriate legislative instruments? 

4. 

CENTRAL DATA REPOSITORIES 

As  mentioned  above  and  detailed  in  the  Staff  Working  Paper,  central  data  repositories 
improve  operational  efficiency  of  OTC  markets  by  facilitating  payment  and  settlement 
instructions and by central processing of corporate events. 

By  their  nature,  central  data  repositories  are  also  essential  sources  of  information  and 
therefore substantially contribute to improving market transparency, especially for the market 
segments  not  covered  by  CCPs.  The  contribution  to  transparency  is  both  toward  regulators 
and  to  the  public.  The  former  should  be  granted  full  and  unimpeded  access  to  central  data 
repositories  to  perform  their  supervisory  functions.  The  latter  can  access  aggregate  market 
information. 

In  view  of  the  broad  interest  for  central  data  repositories,  their  usage  could  be  extended  to 
market segments other than credit default swaps (CDS) and specific regulatory requirements 
(including  transparency  requirements)  may  be  foreseen.  It  is  the  Commission  services' 
understanding that CESR is currently analysing this issue with the respect to the establishment 
of a central data repository in the EU. 

Questions  

(9) 

Are  there  market  segments  for  which  a  central  data  repository  is  not  necessary  or 
desirable? 

(10)  Which regulatory requirements should central data repositories be subject to? 

(11)  What information should be disclosed to the public? 

5. 

MOVE CLEARING OF STANDARDIZED OTC DERIVATIVES TO CCPS 

In  view  of  the  broad  desirability  of  CCP  clearing  for  OTC  derivatives,  it  is  necessary  to 
ensure that it is used to the greatest extent possible. This section looks at the different tools 
that might be considered. 

5.1. 

Defining CCP eligible contracts 

The first prerequisite for CCP clearing concerns clarity about eligibility of contracts. Whether 
a contract is CCP eligible should ultimately be decided by the CCP that is assuming the risk 
associated with the contract. 

There may be a trade-off, however. Requiring a product to be cleared by a CCP might alter 
the  margin  calculations  in  comparison  with  that  product  being  cleared  bilaterally.  Under 

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bilateral  clearing,  margins  are  applied  to  the  portfolio  of  all  products  with  a  particular 
counterparty.  In  contrast,  the  CCP  applies  margin  multilaterally  per  product  range  cleared. 
Moving to a CCP may thus imply higher margins. This margin difference may be especially 
pronounced for illiquid products. However, this increase in required margin needs is there to 
pay for the benefits that the introduction of a CCP brings in terms of systemic risk reduction. 

Some have argued that this may prompt the CCP to clear all products (including the illiquid 
ones), benefiting from clearing fees but not considering the cost due to the increase in margin 
described above. 

However, CCPs do not have an incentive to clear illiquid products that they cannot manage. 
In addition, the users of a CCP can affect the decisions concerning which products a CCP will 
clear  given  that  they  are  members  of  the  risk  committees  (i.e.  the  bodies  in  charge  of  such 
decisions).  Therefore,  leaving  the  CCP  to  decide  on  the  eligibility  criteria  appear  to  be 
appropriate,  and  hence  if  a  contract  is  cleared  by  at  least  one  authorised  CCP  it  should  be 
considered eligible for policy purposes. 

Questions 

(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?  

5.2. 

Incentives to use CCP clearing  

The  considerable  reduction  of  counterparty  risk  associated  with  CCP  clearing  already 
provides an incentive to use it. Using a CCP becomes more valuable for each participant as 
the number of participants increases, since this maximises the potential for multilateral netting 
of claims and obligations. Because of this network externality and in view of the systemic risk 
reduction  provided  by  CCPs,  providing  incentives  to  market  participants  is  economically 
viable and justified from a public policy perspective.  

5.2.1.  Business incentives 

The presence of a CCP in a market brings with it a number of benefits to its participants. First, 
and  most  obviously,  a  CCP  allows  for  risk  mutualisation  thus  providing  a  vital  function  in 
preventing  contagion  in  case  of  failure  of  a  market  participant.  Second,  from  a  day-to-day 
business point of view, it facilitates risk management and position valuation of its users. Next, 
it  reduces  operational  risk  through,  for  example,  process  standardisation  and  legal  risk 
reduction. Finally, a CCP may facilitate reporting of specific information to public authorities. 
As  a  CCP  is  a  natural  data  repository  of  the  contracts  it  clears,  regulators  may  be  able  to 
obtain participant-specific information directly from it without having to go to the individual 
participants, thus exempting the latter from the burden of reporting. 

Questions 

(13)  What  additional  benefits  should  the  CCP  provide  to  secure  a  broader  use  of  its 

services? 

5.2.2.  Regulatory capital incentives - zero-risk weighting 

Under Directive 2006/48/EC (Capital Requirement Directive, CRD), a zero-risk weighting is 
attributed  to  counterparty  credit  risk  exposures  on  derivatives  contracts  that  are  outstanding 
with a CCP, provided that the CCP fully collateralises its exposures with all participants on a 

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daily  basis7.  Although  beneficial  for  certain  market  segments,  e.g.  interest  rates  swaps,  this 
incentive has proved to be insufficient to grant the necessary shift toward a broad use of CCP 
clearing  in  OTC  derivatives  markets.  Therefore,  consideration  might  be  given  for  further 
regulatory  capital  incentives  (see  section  5.2.3.).  The  provisions  related  to  the  zero-risk 
weighting capital treatment are currently under revision in the context of the Basel Committee 
of Banking Supervision and duly consideration is to be given to this work. 

Furthermore, the regulatory capital relief may not be available for all market participants, as 
not  all  users  of  derivatives  are  able  or  willing  to  meet  the  requirements  to  become  a  direct 
participant  in  a  CCP.  This  is  particularly  the  case  for  insurance  companies,  investment  and 
hedge  funds  and  smaller  banks.  Such  users  will  get  CCP  access  indirectly  through  a  direct 
participant (general clearing member). Depending on how the indirect access is granted, the 
indirect  participant  of  a  CCP  is  more  or  less  exposed  to  the  default  of  its  general  clearing 
member.  This  issue  may  be  addressed  by  appropriately  segregating  the  collateral  of  the 
indirect participant at CCP level.  

Questions 

(14) 

Is  the  zero-risk  weighting  a  sufficiently  effective  incentive  for  using  CCPs  across 
different market segments?  

(15)  Should  additional  requirements,  such  as  appropriate  account  segregation,  be 

introduced to apply the zero-risk weighting to indirect participants? 

5.2.3.  Further regulatory capital incentives 

When  a  product  is  CCP-eligible,  it  could  become  a  general  principle  for  it  to  be  cleared 
through  a  CCP.  Therefore,  dealers  and  other  market  participants  might  be  subject  to  an 
additional regulatory cost if they continue to clear CCP-eligible contracts on a bilateral basis. 
However, in some cases, there may be legitimate reasons for not following this principle. In 
that case, an approval mechanism would need to be introduced. 

The rules on credit risk mitigation under the CRD might offer a possible avenue of doing this 
for credit derivatives. According to the CRD, credit default swaps are recognised as credit risk 
mitigation  instruments  only  if  certain  conditions  are  met.  Consideration  might  be  given  on 
whether  different  degree  of  recognition  might  be  given  to  CCP-eligible  CDS  that  are  not 
cleared through an authorised CCP. The overall impact of all the above capital requirements 
should duly be taken into account. 

Questions 

(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? 

(17)  Under which conditions should exemptions be granted and by whom? 

5.2.4.  Monitoring  

In  order  to  verify  that  CCP-eligible  contracts  are  indeed  cleared  by  a  CCP,  continuous 
monitoring  becomes  necessary.  Market  infrastructures,  and  in  particular  trade  repositories, 
will play an important role in this respect. Central data repositories may, in principle, contain 
information on all outstanding contracts and their characteristics (including whether they have 
been cleared by a CCP or not). This should enable supervisors to obtain all necessary data on 

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Annex III, part 2, point 6 Directive 2006/48/EC 

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the  number  of  total,  eligible  and  CCP-cleared  contracts  (the  latter  should  be  cross-checked 
with the information on the open interest present in the CCP for consistency purposes). It is 
also  important  to  ensure  that  contracts  are  not  defined  in  such  a  way  so  as  to  become  non-
CCP-eligible. 

For  the  CDS  market,  as  outlined  in  the  Commission  Communication,  the  Derivatives 
Working  Group  established  by  the  European  Commission  has  proved  to  be  effective  in 
addressing the issues related to the standardisation of European CDS contracts for the purpose 
of facilitating CCP clearing, though some technical issues still need to be solved. Therefore, 
once  these  new  standards  will  be  in  place,  a  large  portion  of  European  CDS  will  likely 
become eligible for CCP clearing. How much of the eligible contracts will actually be cleared 
is too early to say. The ten dealers having signed the letter of commitment to the European 
Commission8 cover roughly 80 per cent of the market, the rest being essentially covered by 
other  credit  institutions  associated  with  banking  federations,  which  also  share  the  same 
objective. 

Questions 

(18)  What  is  the  minimum  acceptable  ratio  of  CCP  cleared/eligible  contract?  What  is  the 

maximum acceptable number of non-eligible contracts? 

(19)  What  statistics  need  to  be  provided  to  regulators  to  make  sure  they  have  all  the 

information necessary to perform their duties?  

5.3. 

Ensuring the safety and soundness of CCPs 

The use of a CCP per se does not guarantee any increase in safety if the CCP is not properly 
structured, organised, supervised and ensures even with its eventual outsourcing arrangements 
easy  accessibility,  timely  execution,  redundancy,  business  continuity  and  effective  risk 
management.  

The  ESCB  and  CESR  are  in  the  process  of  adopting  common  recommendations  for  central 
counterparties,  which  take  into  account  the  specific  risks  related  to  OTC  derivatives.  These 
recommendations,  although  not  binding,  may  form  the  basis  for  such  set  of  requirements. 
However,  common  harmonised  rules  need  to  be  enforceable  and  therefore  non-binding 
recommendations  may  be  insufficient.  Furthermore,  i)  to  ensure  that  CCPs  continue  to  be 
considered a zero risk counterparty even when dealing with much complex instruments; ii) to 
grant  the  necessary  level  of  transparency  and  access  to  regulatory  information;  iii)  to 
guarantee  that  even  indirect  participants  may  benefit  from  the  enhanced  safety  granted  by 
CCPs; and iv) to establish common authorisation regimes, these requirements may be further 
developed.  

Questions  

(20)  How  could  European  legislation  help  ensuring  safety,  soundness  and  a  level  playing 

field between CCPs?  

6. 

INCREASE TRANSPARENCY OF PRICES, TRANSACTIONS AND POSITIONS  

This  section  considers  transparency  of  trading,  transaction  as  well  as  position  reporting  of 
derivatives and other complex products. These issues will be further developed in the context 
of the upcoming MiFID review with more specific questions. 

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Letter  of  commitment from  major  dealer  banks  to  clear  European-referenced  credit  default  swaps  on 
one or more European CCPs, signed on 17 February 2009. 

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6.1. 

Transparency of trading 

Extensive  analysis  and  consultation  have  been  carried  out  in  recent  years  on  whether  more 
transparency  of  trading  activity  in  non-equity  markets  is  required.  Market  participants, 
infrastructure  providers  and  regulators  agree  that  an  adequate  picture  of  ongoing  and  past-
trading  activity  is  necessary  but  disagree  on  the  adequacy  of  existing  arrangements  and  the 
need for regulatory intervention.  

In  the  present  environment  there  are  nevertheless  valid  reasons  to  re-examine  the  need  for 
more  transparency.  First,  more  transparency  of  trading  activity  could  help  instil  better  due 
diligence,  and  ultimately  more  efficiency  in  these  markets.  Second,  a  growing  number  of 
regulators, policy-makers, and market participants, mainly from the buy-side, have pointed to 
recent  experience  as  being  symptomatic  of  a  market  failure  which  more  transparency  could 
partially  help  undo.  Finally,  MiFID  favours  the  development  of  a  harmonised  regulatory 
framework for trading in financial instruments. It can be argued that the present patchwork of 
national  transparency  regimes  for  EU  non-equity  markets  is  hindering  efficiency  and  the 
development of a pan-European level of service provision and access in these instruments. A 
more harmonised transparency approach beyond equities may therefore be necessary in order 
to strengthen investor protection and supervision.  

Questions 

(21)  Should MiFID-type pre- and post-trade transparency rules be extended to non-equities 

products? Are there other means to ensure transparency? 

6.2. 

Transaction reporting of OTC derivatives  

Article  25  of  MiFID  requires  investment  firms  to  report  all  transactions  in  any  financial 
instruments admitted to trading on a regulated market to the competent authority (including 
exchange-traded derivatives and listed structured products), wherever these transactions take 
place (regulated market, MTF or OTC). This means that transactions in OTC derivatives and 
other complex products if these are not admitted to trading on a regulated market are exempt 
from these requirements.  

CESR  has  recently  mandated  a  Task  Force  to  analyse  the  possibility  to  both  collect  and 
exchange reports in some OTC derivatives (e.g. options, warrants, contract for difference and 
CDS)  with  the  objective  to  help  detect  cases  of  market  abuse.  Based  on  the  preliminary 
analysis carried out9, there may be a need to extend the scope of Article 25 to include OTC 
derivative  instruments  whose  underlying  financial  instrument  is  admitted  to  trading  on  a 
regulated market (including corresponding depositary receipts) to ensure that the collection of 
transaction reports in these OTC derivative instruments is made mandatory.10 Most Member 
States appear to support this. 

Questions 

(22)  How  should  transaction  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  competent  authorities  receive  the 
relevant information on OTC derivatives transactions? 

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Call for Evidence on the Technical Standards to Identify and Classify OTC Derivative Instruments for 
TREM, CESR's Transaction Reporting Exchange Mechanism, 2 February 2009. 
Currently,  recital  45  of  MiFID  allows  (but  does  not  require)  Member  States  to  apply  transaction 
reporting obligations to financial instruments that are not admitted to trading on a regulated market. 

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6.3. 

Position reporting to Competent Authorities 

A  periodic  position  reporting  obligation  to  supervisors  could  complement  the  transaction 
reporting  obligation.  The  benefits  of  such  a  measure  might  be  twofold.  From  a  prudential 
perspective, it would make Competent Authorities aware about firms' exposures, and from a 
market surveillance perspective it could improve market oversight and assist in the detection 
of potentially abusive positions. 

The  scope  of  such  a  reporting  obligation  would  have  to  be  carefully  defined  taking  into 
account the specificities of each market (OTC versus exchange-traded derivatives, structured 
credit  products,  etc)  and  the  risk  that  a  lack  of  transparency  in  such  a  market  could  pose. 
Consideration  will  also  need  to  be  given  to  the  level  of  granularity  and  costs  for  firms 
associated  with  reporting.  In  this  respect  the  greater  use  of  CCPs  and  of  central  data 
repositories  can  actually  reduce  the  burden  on  single  reporting  institutions  and  achieve  the 
same level of regulatory information. 

Market  regulators  would  need  to  put  in  place  arrangements  to  be  able  to  easily  exchange 
information.  The  positions  reported  to  the  national  Competent  Authorities  might  have  to  be 
aggregated at the level of CESR in order to have an overview of the European market at all 
times.  

Questions 

(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? 

7. 

MOVE TRADING TO MORE PUBLIC TRADING VENUES  

In  principle,  for  standardised  derivatives  that  are  cleared  by  a  CCP,  the  next  logical  step 
would  be  for  trading  of  these  contracts  to  take  place  on  an  organised  trading  venue  where 
prices and other trade-related information are publicly displayed, such as a regulated market 
(i.e.  derivatives  exchange)  or  a  multilateral  trading  facility  (MTF)  subject  to  transparency 
requirements. This would improve price transparency and strengthen risk management. 

However, the type of standardised contracts that are typically traded on public venues may not 
cater for the full range of derivative users' risk management needs. Most market participants 
have  a  commercial  preference  for  trading  OTC.  However,  the  importance  for  financial 
stability of the existence of transparent and operationally efficient markets must be the main 
consideration.  There  is  a  societal  preference  for  transparent  trading  venues,  as  public  and 
standardised as possible for the purpose of risk assessment and price determination.  

A  system  based  on  competition  between  different  trading  venues  (OTC,  exchanges  and 
MTFs), is also advantageous in terms of market efficiency as long as it subjects all venues to 
adequate  transparency  and  organisational  requirements  that  ensure  fair  competition.  This 
choice  for  transparent  and  organised  trading  is  something  not  unknown  for  other  financial 
markets. The Markets in Financial Instruments Directive (MiFID) abolished the rule whereby 
trades  should  be  carried  out  on  regulated  markets  (the  so-called  "concentration  rule"),  but 
subjected  other  trading  venues  (MTFs,  systematic  internalisers)  to  appropriate  transparency 
requirements. Accordingly, for cash equities, competition between trading venues takes place 
under  the  umbrella  of  common  transparency  and  organisational  rules.  However,  MiFID's 
transparency  regime  currently  does  not  cover  derivatives  and  transaction  reporting  does  not 
apply to financial instruments that are not admitted to trading on a regulated market.  

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The  US  administration  has  recently  announced  legislative  measures  that  may  encourage  the 
greater use of public trading venues for the execution of derivatives transactions.11 

Questions 

(24)  How  can  further  trade  flow  be  channelled  through  transparent  and  efficient  trading 
venues?  What  would  be  the  appropriate  level  of  transparency  (price,  transaction, 
position) for the different derivatives markets? 

8. 

NEXT STEPS 

This document marks the beginning of a nine-week consultation period ending on August XX 
during  which  the  Commission  services  invites  comments  on  this  communication  from  all 
interested parties. Responses can be addressed to markt-g2-consultations@ec.europa.eu. The 
Commission  services  will  publish  all  responses  received  on  the  Commission  website  unless 
confidentiality is specifically requested. 

The  issues  addressed  in  this  document  will  also  be  discussed  at  a  high-level  conference  in 
Brussels, on 25 September. 

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The  US  intends  to  encourage  trade  execution  on  "regulated  exchanges  and  regulated  transparent 
electronic trade execution systems for OTC derivatives" (US Treasury Financial Regulatory Reform, 17 
June 2009). 

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ANNEX – LIST OF QUESTIONS  

Standardisation 

(1)  What  would  be  a  valid  reason  not  to  use  electronic  means  as  a  tool  for  contracts 

standardisation?  

(2) 

Should  contracts  standardisation  be  measured  by  the  level  of  process  automation? 
What other indicators can be used? 

(3) 

Should non-standardised contracts face higher capital charges for operational risk?  

(4)  What other incentives toward standardisation could be used, especially for non-credit 

institutions? 

Strengthening bilateral collateral management 

(5) 

(6) 

(7) 

(8) 

How could the coverage of collateralised credit exposures be improved?  

Are  there  markets  where  daily  valuation,  exchange  of  collateral  and  portfolio 
reconciliation cannot be the goal? Please justify. 

How frequently should multilateral netting be used? 

Should bilateral collateral management be left to self-regulatory initiatives or does it 
need to be incentivised by appropriate legislative instruments? 

Central data repository 

(9) 

Are  there  market  segments  for  which  a  central  data  repository  is  not  necessary  or 
desirable? 

(10)  Which regulatory requirements should central data repositories be subject to? 

(11)  What information should be disclosed to the public? 

CCP clearing 

(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?  

(13)  What  additional  benefits  should  the  CCP  provide  to  secure  a  broader  use  of  its 

services? 

(14) 

Is  the  zero-risk  weighting  a  sufficiently  effective  incentive  for  using  CCPs  across 
different market segments?  

(15)  Should  additional  requirements,  such  as  appropriate  account  segregation,  be 

introduced to apply the zero-risk weighting to indirect participants? 

(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? 

(17)  Under which conditions should exemptions be granted and by whom? 

(18)  What  is  the  minimum  acceptable  ratio  of  CCP  cleared/eligible  contract?  What  is  the 

maximum acceptable number of non-eligible contracts? 

(19)  What  statistics  need  to  be  provided  to  regulators  to  make  sure  they  have  all  the 

information necessary to perform their duties?  

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(20)  How  could  European  legislation  help  ensuring  safety,  soundness  and  a  level  playing 

field between CCPs?  

Transparency requirements 

(21)  Should MiFID-type pre- and post-trade transparency rules be extended to non-equities 

products? Are there other means to ensure transparency? 

(22)  How  should  transaction  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  competent  authorities  receive  the 
relevant information on OTC derivatives transactions? 

(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? 

Public trading venues 

(24)  How  can  further  trade  flow  be  channelled  through  transparent  and  efficient  trading 
venues?  What  would  be  the  appropriate  level  of  transparency  (price,  transaction, 
position) for the different derivatives markets?  

EN 

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