Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank - Ensuring efficient, safe and sound derivatives markets: Future policy actions
Date: 2009-10-20
Institutions: European Commission
Subjects: economic policy, financial equalisation, international cooperation, market supervision, services contract, supplies contract

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 20.10.2009 
COM(2009) 563 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE, THE COMMITTEE OF THE REGIONS AND 
THE EUROPEAN CENTRAL BANK 

Ensuring efficient, safe and sound derivatives markets: Future policy actions 

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COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE, THE COMMITTEE OF THE REGIONS AND 
THE EUROPEAN CENTRAL BANK 

Ensuring efficient, safe and sound derivatives markets: Future policy actions 

(Text with EEA relevance) 

1. 

INTRODUCTION 

Derivatives play a useful role in the economy: they can be used to transfer (all or part of) the 
risks inherent to economic activity from economic agents who are not willing to bear them to 
those who are. However, they also contributed to the financial turmoil by allowing leverage to 
increase and by interconnecting market participants, a fact which went unnoticed because of 
the  lack  of  market  transparency,  resulting  from  the  predominant  over-the-counter  (OTC) 
market  structure.  Already  in  July  this  year,  the  Commission  identified  four  complementary 
tools  to  reduce  the  negative  impact  of  OTC  derivatives  markets  on  financial  stability:  (i) 
increase standardisation, (ii) use trade repositories, (iii) strengthen the use of Central Counter-
party  clearing  houses  (CCPs),  and  (iv)  increase  the  use  of  organised  trading  venues1.  The 
proposed tools have been the subject of a stakeholder consultation and were debated at a high-
level conference on 25 September 20092.  

This Communication examines one by one the main shortcomings of the current derivatives 
market  organisation  as  concerns  both  OTC  and  derivatives  traded  on  organised  trading 
venues. It outlines the policy actions the Commission intends to take in 2010 to address these 
problems  and  thus  meet  the  need  for  greater  stability  and  transparency  in  these  markets  as 
recognised by the De Larosière report, the June 2009 European Council conclusions and the 
G20. All legislative and other proposals to give effect to the policy orientations set out below 
will be subject to appropriate impact assessment. 

2. 

GENERAL APPROACH 

The  Commission  believes  that  a  paradigm  shift  must  take  place  away  from  the  traditional 
view  that  derivatives  are  financial  instruments  for  professional  use,  for  which  light-handed 
regulation  was  thought  sufficient,  towards  an  approach  where  legislation  allows  markets  to 
price  risks  properly.  As  a  result,  the  proposed  measures  will  shift  derivative  markets  from 
predominantly OTC bilateral to more centralised clearing and trading. 

The  various  derivatives  market  segments  differ  in  their  characteristics,  namely  in  terms  of 
risk, operational arrangements and market participants. In principle, the Commission believes 

1 

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Commission  Communication  "Ensuring  efficient,  safe  and  sound  derivatives  markets"  -  COM(2009) 
332, Staff Working Paper SEC(2009) 905, and Consultation document SEC(2009) 914. 
The  replies  to  the  consultation,  the  summary  of  stakeholder  views  as  well  as  a  summary  of  the 
conference and presentations can be found on the Commission's webpage: 
http://ec.europa.eu/internal_market/consultations/2009/derivatives_en.htm 

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that a comprehensive policy on derivatives is necessary in order to avoid market participants 
exploiting differences in rules, i.e. regulatory arbitrage. However, where justified, the policy 
proposals will duly take into account the specificities of the asset class and contracts involved 
as  well  the  specificities  of  the  market  participants,  also  striking  the  right  balance  between 
financial  and  non-financial  institutions.  At  the  same  time  the  Commission  will  take  into 
account the specificities of certain commodity markets, e.g. electricity and gas markets, which 
are  particular 
the  risk 
characteristics of the different market segments, for example, the Commission tackled credit 
default swaps first3.  

their  underlying  physical  market  structure.  Considering 

in 

2.1. 

International cooperation 

The market for derivatives is global, and regulatory arbitrage must be excluded. To ensure a 
robust and convergent international regulatory outcome, the proposals below are in line with 
the objective outlined in the G20 meeting of 25 September 2009, calling for the improvement 
of OTC derivatives markets4. In order to ensure a coherent implementation of these policies 
across  the  globe,  the  Commission  intends  to  further  develop  the  technical  details  in 
cooperation with its G20 partners, the Financial Stability Board, and in particular with the US, 
which is also in the process of designing a new approach to derivatives markets. 

2.2. 

Non-financial institutions 

The task of the financial system is to channel funds from savers to investment projects, also 
by allowing for wider risk sharing. Non-financial institutions therefore have a vital interest in 
financial  stability.  Inasmuch  as  non-financial  firms  have  bought  protection  from  a  financial 
firm and in so doing have transferred their risks into the financial system, they have generally 
benefited from the underpricing of risk in the build-up phase of the crisis. Through the severe 
decline  in  economic  activity,  they  have  also  fallen  victim  of  the  financial  crisis.  Thus,  non-
financial  institutions  are  part  of  the  web  of  mutual  dependence  created  by  derivatives 
contracts and, as such, they would benefit from the policies aiming at reducing counterparty 
credit risk and increasing transparency outlined below. 

The Commission recognises the vital role of derivatives in hedging the risks that result from 
normal  business  operations.  While  most  hedging  should,  in  principle,  be  achieved  through 
tailor-made  derivatives  will  still  be  necessary. 
non-customised/standard  derivatives, 
Accordingly,  the  Commission  does  not  want  to  limit  the  economic  terms  of  derivative 
contracts,  neither  to  prohibit  the  use  of  customised  contracts  nor  to  make  them  excessively 
costly  for  non-financial  institutions.  However,  the  function  of  prices  to  allocate  resources 
must  be  restored:  derivatives  should  be  appropriately  priced  in  relation  to  the  systemic  risk 
they  entail,  in  order  to  avoid  those  risks  being  ultimately  passed  on  to  taxpayers. 
Strengthening  financial  stability  in  this  way will  make  severe  economic  crises  less  likely  in 
the future and put Europe on a more sustainable growth path. 

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Commission Press Release "Major step towards financial stability: European market for credit default 
swaps becomes safer", IP/09/1215, 31 July 2009. 
"All  standardized  OTC  derivative  contracts  should  be  traded  on  exchanges  or  electronic  trading 
platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC 
derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be 
subject  to  higher  capital  requirements.  We  ask  the  FSB  and  its  relevant  members  to  assess  regularly 
implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate 
systemic risk, and protect against market abuse." 

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The cost of strengthening the market infrastructure for OTC derivatives should not be carried 
by the taxpayer but by those who directly enjoy the economic benefit from using derivatives. 
The larger part of that cost will be borne by financial firms, but some of it can be expected to 
fall  on  non-financial  institutions.  However,  it  is  expected  that  the  costs  will  decrease  over 
time: the more widely central market infrastructures are used, the lower the costs per user will 
become,  as  network  effects  come  into  play.  Moreover,  the  non-financial  corporate  sector  is 
likely to be the main beneficiary of the proposals on transparency made in section 5. 

The Commission will carry out impact assessments before finalising its proposals. These will 
take  into  account  all  stakeholders'  evidence  about  the  costs  and  benefits  of  the  policy 
orientations  set  out  below,  in  order  to  set  them  in  proportion  to  the  risks  to  taxpayers, 
recognising that most non-financial institutions are not of systemic importance.  

In  order  to  promote  competitiveness  and  growth  of  the  European  industry,  the  Commission 
will strive to ensure that any future policy option allows non-financial institutions to manage 
the risks inherent to their business. 

The overall objectives of safer derivatives markets should nevertheless not be undermined by 
loopholes. 

3. 

COUNTERPARTY CREDIT RISK 

The crisis has shown, inter alia, that market participants did not price counterparty credit risk 
correctly.  Clearing  is  the  way  by  which  this  risk  is  mitigated.  Clearing  can  either  occur 
bilaterally  between  the  two  counterparties  or  at  central  market  level,  by  means  of  a  central 
counterparty  (CCP),  thus  involving  appropriate  collateralisation.  The  following  proposals 
therefore aim to strengthen the clearing of derivatives both at central and bilateral level.  

3.1. 

Central clearing: safety and soundness 

The Commission has identified CCP-clearing as the main tool to manage counterparty risks 
and  the  G20  shares  this  view.  Currently,  CCPs  provide  services  on  a  European  basis  but 
remain  regulated  at  national  level,  as  there  is  no  Community  legislation  covering  CCPs5. 
While  the  ESCB-CESR6  recommendations  have  started  a  process  of  converging  national 
approaches, they are not binding. In view of the CCPs systemic importance, the Commission 
intends  to  propose  legislation  governing  their  activities  so  as  to  eliminate  any  discrepancies 
among  national  legislations  and  ensure  safety,  soundness  and  proper  governance.  In  its 
Communication of 3 July 2009, the Commission also noted that there are strong reasons for 
CCP clearing being located in Europe, relating to regulatory, supervisory and monetary policy 
concerns. Today many CCPs are located in the EU but the setting-up of a clear regulatory and 
supervisory framework will significantly contribute to this. 

CCPs  provide  services  for  several  asset  classes,  be  it  cash  equities,  fixed  income  or 
derivatives (listed or OTC). It would accordingly be incoherent to draft legislation governing 

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So  far,  the  only  piece  of  Community  legislation  covering  the  safety  and  soundness  of  CCPs  is  the 
Settlement  Finality  Directive  (SFD).  While  essential,  as  it  covers  the  effects  of  a  default  of  a  CCP 
participant from spreading to other participants, the SFD is a crisis management instrument, not a broad 
instrument  covering  all  aspects  of  CCPs'  activities  and  it  is  accordingly  insufficient  to  ensure  their 
safety and soundness. 
European System of Central Banks and Committee of European Securities Regulators, respectively. 

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their activities in one asset class only. Instead, the forthcoming legislative proposal on CCPs 
will  cover  the  same  range  of  financial  instruments  as  MiFID,  so  as  to  achieve  consistency 
across  the  value  chain  and  avoid  loopholes.  The  Commission  will  therefore  propose 
legislation governing CCP activity covering the following key requirements: 

(1) 

(2) 

(3) 

(4) 

Conduct of business and governance (e.g. measures to address conflicts of interest, 
access,  transparency  of  risks  and  procedures,  business  continuity,  and  minimum 
standards of expertise). 

Rules to ensure that CCPs do not employ low risk-management standards. This may 
require  the  European  Securities  Markets  Authority  (ESMA),  in  applying  the  rules 
provided in the basic legislative act, to develop technical standards, so as to ensure that 
CCP  participants  will  benefit  from  the  lowest  possible  regulatory  capital  charge  for 
counterparty credit risk of centrally-cleared contracts, following the regime currently 
being finalised by the Basel Committee. In view of their key role in managing risks, 
CCPs should be subject to adequate capital requirements.  

Legal  protection  to  collateral  and  positions  provided  by  clearing  members' 
customers,  so  as  to  encourage  a  wide  range  of  market  participants  to  use  central 
clearing. The rules should ensure segregation of assets and portability of client assets 
and positions.  

Authorisation granted, under this proposal will allow CCPs to provide their services 
in  all  Member  States.  In  order  to  avoid  double  scrutiny  and  to  foster  mutual  trust 
between  authorities,  the  Commission  believes  the  European  Securities  and  Markets 
Authority (ESMA) should give CCPs authorisation to operate in the EU. With a view 
to ensure adequate on-going supervision at European level, the Commission will seek 
an appropriate allocation of responsibilities between ESMA and national supervisory 
authorities. This may include the possibility to grant ESMA direct supervisory powers 
in  view  of  the  specific  nature  and  in  particular  the  pan-European  reach  of  CCPs. 
Alternatively, recognizing the potential or contingent liabilities that may be involved, 
it  might  be  appropriate  for  on-going  supervision  to  be  entrusted  within  ESMA  to  a 
college of supervisors from the Member States most directly affected. 

(5) 

ESMA should also assist the Commission in preparing decisions for recognising third 
country  CCPs  that  are  subject  to  comparable,  comprehensive  supervision  and 
regulation, in order to assess requests for market access from third country providers 
on the basis of prudential concerns. 

3.2. 

Collateralisation in bilateral clearing  

While in an ideal world all derivatives should be centrally cleared, in reality not all of them 
are suitable for this. Some products may be too customised, whereas other products may not 
be  liquid  enough  for  central  clearing.  Such  contracts  will  continue  to  be  cleared  bilaterally 
with counterparties exchanging collateral to cover their exposure. However, current collateral 
levels are too low and do not reflect the risk that bilaterally-cleared derivatives trades pose to 
the  financial  system  when  they  reach  a  certain  critical  mass.  Financial  firms  need  to  hold  a 
larger amount of collateral to cover their credit exposure. 

The  Commission  will  propose  legislation  requiring  financial  firms  (e.g.  credit  institutions, 
investment  firms,  investment  management  companies)  to  post  initial  margin  (specific  to 

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counterparty  characteristics)  and  variation  margin  (the  change  in  the  value  of  a  contract). 
These requirements would also provide an incentive to use central clearing, as it would reduce 
the  economic  advantage  of  providing  too  little  collateral  compared  with  the  strict  collateral 
demands made by CCPs. 

Except in the event of default, exchanging collateral does not impact on the net income of an 
entity. Non-financial  corporate users of  derivatives, however, may not want to provide cash 
collateral for variation margin, as it might constrain their liquidity.  This would  expose their 
financial counterparty to credit risk, which it will have to manage with its client. Variation-
margin requirements, if needed for non-financial firms, should be tailored in such a way that 
they  do  not  undermine  the  corporate  sector's  ability  to  use  derivatives  for  transferring  risk, 
especially in the case of companies whose use of derivatives is below a given threshold. On 
the  other  hand,  awarding  special  treatment  for  non-financial  firms  could  create  loopholes 
which  would  enable  financial  firms  to  engage  in  regulatory  arbitrage.  Any  possible 
exemptions should be designed in such a way that eliminates any potential for abuse. 

3.3. 

Capital charges on bilateral clearing 

In  its  July  Communication,  the  Commission  explored  the  idea  that  non-centrally  cleared 
contracts be subject to higher capital requirements. Following the G20 meeting in Pittsburgh, 
this has now become an internationally accepted principle. Higher capital requirements would 
reflect  the  higher  risk  that  such  contracts  pose  to  the  financial  system.  Since  these  capital 
charges apply after bilateral collateral exchange and netting of exposures, this approach would 
further strengthen the incentive for market participants to put a wider range of products onto 
central  clearing.  The  Commission  will  therefore  ensure  that  the  rules  properly  distinguish 
between, on the one hand, the lower counterparty credit risk of contracts that are cleared on a 
CCP, and the higher counterparty credit risk of those where clearing is done bilaterally. The 
primary  way  by  which  this  can  be  done  is  to  widen  the  difference  of  the  capital  charges 
between  centrally-cleared  and  bilaterally-cleared  contracts  contained 
the  Capital 
Requirements Directive (CRD)7.  

in 

These  changes  should  be  consistent  with  the  approach  outlined  by  the  Basel  Committee  on 
Banking Supervision, the global forum for international capital rules for banks, so as not to 
distort  competition  and  to  limit  the  potential  for  regulatory  arbitrage.  The  Commission  will 
work with its partners to ensure that an agreement is reached and will do its utmost to be able 
to propose amendments to the CRD, along the above lines, in 2010. 

3.4.  Mandating central clearing 

On  top  of  capital  charges  for  non-centrally  cleared  products,  the  Commission  intends  to 
propose making it mandatory to clear standardised derivatives through CCPs, in line with the 
G20 declaration. When developing its detailed proposals, the Commission will work with its 
partners in the G20, and notably the US, to achieve ambitious solutions to the practical issues 
related  to  making  the  requirement  operational.  This  involves,  in  particular,  defining  which 
contracts  can  be  regarded  as  standardised  for  central  clearing.  While  standardised  contracts 
should become the norm, non-standardised contracts should also be subject to more in-depth 
oversight by supervisors. 

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Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the 
taking up and pursuit of the business of credit institutions (OJ L 177, 30.6.2006, p. 1). 

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4. 

OPERATIONAL RISK 

Operational  risk  relates  to  losses  resulting  from  inadequate  or  failed  internal  processes,  or 
from external events, and includes legal risk. The market has been making efforts to reduce 
operational risk. For example, market practice has generated standard legal documentation for 
a  considerable  part  of  the  derivatives  market.  Moreover,  market  participants  have  gradually 
moved to electronic processing of trades. These ongoing efforts are likely to be boosted by the 
mandatory use of data repositories and the widening use of central clearing. These efforts will 
result in more standardisation of contracts in terms of electronic processing and standard legal 
terms  (without  affecting  the  economic  terms  of  the  contracts),  which  will  also  facilitate 
central clearing. 

However, the Commission considers that ongoing industry efforts to reduce operational risks 
should  be  reinforced.  Therefore  the  Commission  intends  to  assess  whether  to  re-shape  the 
operational  risk  approach  in  the  CRD  in  order  to  prompt  standardisation  of  contracts  and 
electronic processing. 

In  addition,  more  collective  action  is  needed  by  market  participants.  Therefore,  the 
Commission  will  further  build  on  the  success  of  the  Derivatives  Working  Group  and  set 
ambitious European targets, with strict deadlines, for legal- and process-standardisation, while 
ensuring  that  global  efforts  take  due  account  of  European  specificities  so  as  to  deliver  full 
benefits also in Europe.  

5. 

TRANSPARENCY 

OTC  derivatives  markets  have  clearly  suffered  from  a  lack  of  transparency  of  prices, 
transactions and positions. The lack of transparency to regulators and the market has varied 
with time and across products, but has overall hindered regulators from efficiently supervising 
derivatives markets in terms of systemic risk and market abuse. For market participants, it has 
created  difficulties  in  accessing  reliable  prices,  assessing  risks,  valuing  positions,  and 
checking best execution. 

5.1. 

Trade repositories 

Systemic  risk  and  financial  regulators  need  to  have  a  complete  overview  of  the  derivatives 
market. It should therefore become mandatory to report all transactions to trade repositories. 
Information  on  trades  made  on-exchange  or  cleared  through  a  CCP  can  be  provided  to 
regulators directly by these entities. The Commission will propose legislation governing trade 
repositories as well as new reporting obligations on market participants.  

Repositories  will  play  a  central  role  in  the  new  market  structure.  They  should  therefore  be 
regulated  in  order  to  ensure  that  they  are  operated  in  a  safe,  sound  and  efficient  manner. 
Legislation should provide a common legal framework for the operation of trade repositories 
and should cover, inter alia, authorisation/registration requirements, access and participation 
to a repository, disclosure of data, data quality and timeliness, access to data, safeguarding of 
data, legal certainty of registered contracts, governance and operational reliability8.  

8 

An initiative aiming for this goal has been launched by the OTC Derivatives Regulators Forum. 

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The Commission believes that ESMA should be responsible for authorising and supervising 
trade  repositories,  as  repositories  provide  their  services  on  a  European,  if  not  global,  basis. 
ESMA should also be responsible for authorising the operation of third-country repositories in 
the EU on the basis of a Commission decision on the equivalence of the regulatory framework 
in  question,  based  on  prudential  concerns.  On  a  reciprocal  basis,  ESMA  should  ensure  that 
European regulators have unfettered access to complete global information. In the absence of 
such access, the Commission would encourage the creation and operation of European-based 
trade  repositories.  Ultimately,  therefore,  ESMA  will  act  as  a  gateway  for  disseminating 
information  on  derivatives  to  national  financial  services  regulators  as  well  as  sectoral 
regulators9. 

5.2. 

Trading on organised markets 

The  G20  agreed  that  "all  standardized  OTC  derivative  contracts  should  be  traded  on 
exchanges  or  electronic  trading  platforms,  where  appropriate."  In  the  EU,  this  implies 
ensuring that eligible trades for exchange-trading take place on organised trading venues, as 
defined  by  MiFID10.  Almost  all  derivatives  exchanges  use  a  central  counterparty.  Adding 
exchange-trading to central clearing would eliminate the bilateral nature of concluding trades, 
resulting in highly visible prices, volumes and open interest, and facilitate market access. 

5.3. 

Pre- and post-trade transparency 

Trading  on  organised  venues  will  need  to  be  accompanied  by  a  strengthening  of  the 
provisions applicable to such venues, notably as regards transparency of trading. Harmonising 
pre-  and  post-trade  transparency  requirements  for  the  publication  of  trades  and  associated 
prices and volumes across the various organised venues needs to be carefully considered, also 
in  the  case  of  OTC  markets.  It  will  be  key  to  avoid  loopholes  in  the  framework  of  trading 
venues, and to ensure derivatives are fully covered. This will be addressed within the review 
of MiFID in 2010.  

The  increased  transparency  obligations  will  need  to  be  measured  so  as  to  mitigate  any 
excessive negative side-effects on liquidity and disproportionate administrative costs.  

In addition, in Pittsburgh the G20 leaders have agreed "to improve the regulation, functioning, 
and transparency of financial and commodity markets to address excessive commodity price 
volatility."  Financial  regulation  will  be  amended,  as  part  of  efforts  to  ensure  that  EU 
agriculture  derivatives  markets  keep  their  initial  purpose  of  price  discovery  and  hedging  as 
tools  to  cope  with  price  volatility11.  These  measures  will  be  introduced  in  parallel  with 
transparency  requirements  for  all  derivative  (and  possibly  also  other  non-equity)  markets, 
namely as part of the MiFID review. 

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10 
11 

In certain commodity derivatives markets (e.g. electricity and gas) there are particular needs to look at 
the interdependence between spot and derivatives markets. ESMA's ultimate function as a gateway will 
ensure that repositories have one main regulator, which is important for efficiency. This will also ensure 
that sectoral regulators will have a convenient access point to information they need. Since the prime 
purpose of  mandating  trade repositories  is  financial  stability,  oversight  structures for  commodity  spot 
markets may be designed differently. 
Regulated Market, Multilateral Trading Facility, or Systematic Internaliser. 
The Commission intends to further address these issues in the forthcoming Communication on a better 
functioning food supply chain in Europe. 

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In  EU  electricity  and  gas  markets,  in  2010  the  Commission  will,  as  a  component  of  a 
comprehensive  market  integrity  package,  bring  forth  proposals  to  ensure  the  publication  of 
wholesale trades also in spot markets, in order to improve price discovery, market access and 
overall public confidence12.  

6. 

MARKET INTEGRITY AND OVERSIGHT 

In line with the G20 conclusions, various measures are already underway in the EU towards 
enhancing market integrity in derivatives markets.  

The review of the Market Abuse Directive in 2010 will extend relevant provisions in order to 
cover  derivatives  markets  in  a  comprehensive  fashion.  European  securities  regulators  are 
advancing with requiring transaction reports in OTC derivatives. In the context of efforts to 
align the rules applicable to physical and financial energy markets, a tailor-made proposal for 
the EU level oversight of electricity and gas spot markets  is foreseen ensuring transparency 
and  market  integrity.  Similarly,  the  Commission  is  to  examine  by  end-2010  whether  the 
market  for  emission  allowances  is  sufficiently  protected  from  insider  dealing  and  market 
manipulation and, if appropriate, bring forward proposals to ensure it13. Moreover, in the field 
of  agriculture,  more  complete  transaction  and  position  reporting  to  financial  regulators  of 
derivatives trading activity is foreseen.  

The MiFID review will also conclude the work on exemptions for certain commercial firms 
dealing in commodity derivatives. MiFID provisions including authorisation and operational 
requirements,  reporting  and  conduct  of  business  rules  do  not  apply  to  such  firms.  Findings 
from  consultations14,  and  recent  developments  calling  for  financial  markets  regulation  to 
cover all relevant participants, will be taken into account when reaching conclusions. 

Finally,  the  Commission  intends  to  propose  rules  to  give  regulators  the  possibility  to  set 
position limits to counter disproportionate price movements or concentrations of speculative 
positions15.  

12 

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14 

15 

In  January  2009,  the  Committee  of  European  Securities  Regulators  (CESR)  and  the  European 
Regulators'  Group  for  Electricity  and  Gas  (ERGEG)  recommended  to  the  Commission  to  develop 
specific  trade  transparency  arrangements  for  electricity  and  gas  trading  as  part  of  efforts  to  improve 
market access and price discovery. 
Article 12(1a) of Directive 2003/87/EC as amended. 
See  for  example,  advice  of  the  Committee  of  European  Banking  Supervisors  and  Committee  of 
European  Securities  Regulators  (http://www.cesr.eu/index.php?docid=5306)  and 
the  European 
Securities Markets Expert Group 
(http://ec.europa.eu/internal_market/securities/docs/esme/commodity_derivatives_en.pdf) 
This is particularly relevant for commodity markets. See e.g. footnote 11. 

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7. 

SUMMARY 

The  Commission  believes  that  these  actions  will  achieve  a  paradigm  shift  away  from  the 
traditional view that derivatives are financial instruments for professional use, for which light-
handed  regulation  was  thought  sufficient,  towards  an  approach  where  risks  are  priced 
properly. The general approach will limit the potential for loopholes and regulatory arbitrage.  

The table below summarises the concrete policy actions outlined above. The Commission will 
now  start  the  process  of  drafting  legislation,  notably  by  launching  impact  assessments,  in 
order  to  come  forward  with  ambitious  legislation  to  regulate  derivatives  in  2010.  When 
finalising these proposals, the Commission will work closely with all stakeholders in the EU 
as well as with its global partners. It is only by acting together that we lay the foundation for 
truly efficient, safe and sound derivatives markets. 

Future policy actions for ensuring efficient, safe and sound derivatives markets 

Objective 

Proposed actions 

Time line 

Reduce counterparty credit 
risk - strengthen clearing 

(1) 

Propose legislation on CCP 
requirements, governing:  

Mid 2010 

(a) 

(b) 

(c) 

safety requirements (e.g. 
conduct of business, 
governance, risk 
management, legal protection 
of collateral and positions) 

authorisation/withdrawal of 
authorisation and supervision 
of CCP 

mandating of CCP clearing of 
standardised derivatives 

(2) 

Amend CRD in order to: 

End-2010 

End 2010 

On-going 

Mid-2010 

End-2010 

(a) 

(b) 

Mandate financial firms 
supplying initial and variation 
margin; 

Substantially differentiate 
capital charges between CCP-
cleared and non-CCP cleared 
contracts in CRD;  

Assess whether to re-shape the 
operational risk approach in the CRD to 
prompt standardisation of contracts and 
electronic processing. 

Work with industry to increase 
standardisation of legal regimes and 
processes; 

Propose legislation on trade 
repositories: 

(a) 

(b) 

Regulate trade repositories 

Mandate reporting of OTC 
derivatives transactions to 
trade repositories;  

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; 

Reduce operational risks - 
standardisation  

Increase transparency - trade 
repositories  

Increase transparency – 
trading 

(3) 

(4) 

(5) 

(6) 

(7) 

EN 

10 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Improve market integrity 

(8) 

(9) 

(10) 

(11) 

Enhanced trade and price transparency 
across venues and OTC markets, as 
appropriate, in MiFID; 

Conclude review of exemptions from 
MiFID for commodity firms. 

Extend MAD to OTC derivatives; 

End-2010 

Give regulators the power to set position 
limits in MiFID. 

EN 

11 

   EN