EU watchdog sees limit to exchange derivatives trading

* ESMA: Clearable derivatives contracts will be costed

* UK’s FSA against permanent commodities limits

* Chi-X Europe calls for break up of exchange “silos”

(Updates with FSA, Chi-X)

PRAGUE/LONDON, April 13 (Reuters) – Not all bespoke derivatives can be traded on an exchange and regulators should not shoehorn the sector into a stock market structure, a top European Union supervisor said on Wednesday.

“I think we all share the view that there are limits to what can actually be traded on these types of organised platforms and there are also differences in the way in which derivatives can be traded compared to equities trading,” Steven Maijoor told a meeting of the International Derivatives and Swaps Association.

Maijoor, giving his first keynote speech as chairman of the new European Securities and Markets Authority (ESMA) in Prague, said some features of the stock market need to be brought into the derivatives sector.

“Notably transparency, liquidity, operational efficiency and equal market access are the most obvious objectives,” he said.

“However, it seems also clear that a ‘copy-paste’ approach cannot be taken, given the unique features of derivatives markets,” Maijoor added.

Leaders of the world’s top 20 economies (G20) want contracts in the $600 trillion off-exchange sector to be standardised, centrally cleared and traded on an exchange or electronic platform, where possible by the end of 2012.

The aim is to inject more light into the opaque sector where contracts are among banks or between banks and companies who want to hedge risks such as adverse currency moves.

Regulators were alarmed with the inability to find out quickly who was exposed to U.S. insurer AIG (AIG.N) and collapsed U.S. bank Lehman Brothers during the financial crisis.


G20 finance ministers meet later this week in Washington where the group’s president France will try to push ahead with tougher regulation of commodity derivatives.

France blames speculators for pushing up food prices but others say supply and demand factors are the key drivers.

G20 countries like Britain oppose permanent limits on derivatives market positions, saying this is tantamount to price controls but there is broad consensus on better disclosure.

David Lawton, head of market infrastructure policy at Britain’s Financial Services Authority, told the Trade Tech conference in London that position limits were “generally inflexible tools and difficult to set at appropriate levels”.

The derivatives industry fears a draft EU law to implement the G20 pledges will make it harder to properly hedge risks for customers such as airlines.

The United States is planning to give exemptions for non-financial derivatives users to meet such concerns.

ESMA will play a key role in determining which contracts are liquid enough so they will have to be centrally cleared and traded on a platform rather than bilaterally.

There will be a cost-benefit analysis for each class of derivatives before a final decision is made, Maijoor said.

The global pledges are being introduced into an EU law now making its way through the Brussels legislative machine.

“Transparency requirements will likely differ slightly for each type of derivative with certain exemptions in particular for large transactions in order to avoid a negative impact on liquidity,” Maijoor said.


There are fears over competition in the planned merger of Deutsche Boerse (DB1Gn.DE) and NYSE Euronext (NYX.N) which would account for 94 percent of listed derivatives trading in Europe with captive clearing and settlement “silos”.

The EU’s antitrust arm will rule on the merger in Europe.

“We think the competition authorities should look at breaking up the vertical silos by requiring divestment of clearing, for example,” Denzil Jenkins, director of regulation at Chi-X Europe, a share trading platform, told Trade Tech.

“In terms of derivatives, the G20 agenda of bringing more onto platforms is a major plank of policy. The quid pro quo we need is to have more effective competition in derivatives, including listed derivatives and clearing,” Jenkins added.

He backed moves by Britain and other EU states to extend the draft EU OTC derivatives law to all derivatives as a way of injecting competiton into vertically integrated exchanges. (Writing by Huw Jones; Editing by Jon Loades-Carter and David Cowell)


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