European Swaps Regulation - White Papers
White papers, green papers, discussion papers, consultation papers, and other reports addressing European swaps regulation.
- 1 Financial Stability Board - OTC Derivatives Market Reforms: Progress report on Implementation - April 15, 2011
- 2 State Street: The Changing Shape of European Investment Management
- 3 Committee of European Securities Regulators: Standardisation and Organised Platform Trading of OTC Derivatives
- 4 Egmont: Addressing the Financial Crisis: The EU’s Incomplete Regulatory Response
- 5 ECMI: Shaping Reforms and Business Models for the OTC Derivatives Market
- 6 House of Lords European Union Committee: The Future Regulation of Derivatives Markets: Is the EU on the Right Track
- 7 Guidance to Report Transactions on OTC Derivative Instruments - CESR - February, 2010
- 8 International Centre for Financial Regulation: The Future of International OTC Derivatives Regulation
- 9 Deutsche Börse Group: The Global Derivatives Market - A Blueprint for Market Safety and Integrity
- 10 International Organization of Securities Commissions: Unregulated Financial Markets and Products
- 11 References
Financial Stability Board - OTC Derivatives Market Reforms: Progress report on Implementation - April 15, 2011
April 15, 2011
In October 2010, the FSB issued a report on the implementation of OTC derivatives market reforms. In the report, the FSB made 21 recommendations addressing practical issues that authorities may encounter in implementing the G-20 Leaders’ commitments concerning standardization, central clearing, exchange or electronic platform trading, and reporting of OTC derivatives transactions to trade repositories. At a subsequent meeting in November 2010, G-20 Leaders endorsed the FSB recommendations and asked the FSB to monitor OTC derivatives market reform progress regularly. This paper highlights a number of issues which will have a bearing on whether the G-20 commitments can be implemented in an internationally consistent manner by end-2012. Issues being assessed include:
- Standardization among jurisdictions;
- Central counterparty (CCP) clearing;
- Exchange or electronic platform trading; and
- Reporting to trade repositories.
State Street's Vision Series, May, 2011
This publication offers an overview of the changes to European asset managers' business structure and strategy in this era of regulatory change. The study contrasts the past regulatory landscape, which centered on market efficiency, with the current focus of investor protection. For example:
- Alternative Investment Fund Managers Directive (AIFMD), expected to be in force in the first half of 2013.
- Updated Undertakings for Collective Investment in Transferable Securities (UCITS V).
- Basel III capital standards.
- European Market Infrastructure Regulation (EMIR).
The paper speculates as to the "winners and losers" of the regulatory reform and the impact of U.S. regulations on Europe. It concludes with a table of European regulations, the current status of each regulation, and the entities who will be impacted.
Committee of European Securities Regulators: Standardisation and Organised Platform Trading of OTC Derivatives
December 21, 2010
Note: As of January 2011, the Committee of European Securities Regulators is now the European Securities and Markets Authority.
From the white paper:
"In order to further the objectives of the G20, in relation to the promotion of an efficient and sound derivatives market, CESR considers that the current situation is unsatisfactory and proposes that steps should be taken to increase the proportion of over-the-counter (OTC) derivatives being standardised by asset class.
"CESR believes that a higher level of legal, operational and product standardisation (including increased use of electronic confirmation systems) can be achieved and would be beneficial for operational efficiency and the reduction of systemic risk. This should be achieved through the development of carefully defined industry targets, with arrangements to monitor the achievement of the targets, according to the scope and processes described below."
From the white paper:
"The EU committed itself to an important reform of financial sector regulation. In its 2009 Communication entitled 'Driving European recovery' the European Commission lists five key objectives with regard to this reform, namely to:
- build a more secure supervisory framework;
- fill in gaps of European and national regulation;
- improve confidence in the financial sector;
- adjust risk management of the financial sector;
- ensure more effective sanctions against market wrongdoing.
"These five objectives are required to achieve the Commission’s overarching final goal: a sound and secure financial system that operates in a single European market. The Commission has taken a wide range of regulatory initiatives to meet this goal. The aim is to complete the legislative reforms by the end of 2011.
"In this paper we evaluate the European efforts to achieve a sound and secure financial system. In the first five chapters, we examine the work completed by European institutions to achieve each of the aforementioned objectives. As a way of concluding, we provide an overall evaluation by discussing whether or not efforts will lead to a secure financial system."
From the white paper:
"Now that the worst of the financial storm is over, regulators are setting new strategies to deal with the systemic importance of the €427 trillion ($604 trillion) over-the-counter (OTC) derivatives market. This paper explores the three major sources of disruptive effects in OTC derivatives: liquidity, counterparty risk and legal uncertainty. These risks affect the value chain of a typical derivative transaction and weaken the economic and legal rationale behind their widespread use. On the policy side, commitments have been made at G-20 level to draft uniform rules on a global scale “to build a safer financial system”. This paper finds, however, that in practice, the EU and US proposals lay out divergent roads to meet common objectives and the author warns that such divergences may encourage regulatory and supervisory arbitrage. Policy options currently under discussion may need further revision. For instance, access to network clearing infrastructures, such as CCPs, can only be made available to a restricted group of eligible derivative products. Mechanisms of adverse selection and moral hazard, then, may at any time affect the efficient functioning of these crucial infrastructures for financial markets."
House of Lords European Union Committee: The Future Regulation of Derivatives Markets: Is the EU on the Right Track
March 31, 2010
From the white paper:
"This report examines the European Commission’s Communications on Ensuring efficient, safe and sound derivatives markets. The regulation of derivatives markets is a complex subject. We had only a short time to complete this inquiry, and we do not attempt to come to definitive conclusions on any of the issues found in this report but rather to highlight key points in the forthcoming discussions on regulation of this complex area.
"Derivatives are used by businesses to hedge against risks outside of their control, for example fluctuations in commodity prices. However, they are also used as tools for financial speculation. The lack of transparency in the derivatives market and the failure to identify a build-up in risk can cause market instability.
"We found that the Commission proposals for increasing transparency in the so-called Over-the-Counter (OTC) derivatives market (see paragraph 8), through reporting OTC derivatives contracts which are not centrally cleared to a trade repository, will go some way to addressing concerns that the OTC derivatives market is opaque and ineffectively supervised. We also found support amongst witnesses for increased use of standardised contracts (see Box 6) and of central clearing (see paragraph 63). However, there are questions as to what types of contracts will be covered by the Commission’s definition of derivatives. A consequence of a wide definition could be to extend application of the regulation to derivatives used by non-financial businesses that have little effect on financial stability."
In February, 2010, the Committee of European Securities Regulators (CESR) published a consultation paper, listing several methods for transaction reporting of OTC derivatives, which they see as necessary for regulating and ensuring stability in the market. The main points that the paper covers are:
- Transaction reporting in Europe - The Market in Financial Instrument Directive (MiFID) gives regulatory authorities the power and obligation to collect transaction reports on financial instruments traded in regulated markets in order to prevent market abuse. However, many regulatory authorities recognize that there are a range of over-the-counter (OTC) financial instruments that can also be used for the purposes of market abuse, and would like to extend the collection of transaction reports to include these OTC instruments.
- The Transaction Reporting Exchange Mechanism - In November of 2007, CESR implemented an IT system to facilitate the exchange of transaction reports amongst regulators called the Transaction Reporting Exchange Mechanism (TREM). While TREM was originally limited to reports on regulated markets, CESR decided to amend TREM to include OTC derivative instruments.
- Scope of Transaction Reporting on OTC derivative instruments - CESR decided that only transactions on derivatives whose underlying instrument is traded on a regulated market should be exchanged, including: options, warrants, futures, contract for difference and total return swap, spreadbets, swaps (except CfDs, TRS and CDS), credit-default swaps, and other "complex derivatives".
- Identification and classification of OTC derivative instruments - CESR proposes a common exchange protocol that would standardize the data and language in the transaction reports that market participants exchange.
International Centre for Financial Regulation: The Future of International OTC Derivatives Regulation
November 24, 2009
From the white paper:
"The objectives of the session:
- Understand the issues within the OTC derivatives market that have led to calls for greater regulation, centralised clearing and exchange-trading
- Determine potential effects of, and problems with, outstanding and forthcoming regulatory proposals
- Discuss alternatives"
From the white paper:
"In order to minimize this systemic risk and to create a well-functioning market, both safety and integrity need to be ensured. As such, a blueprint that effectively reduces the systemic risk in the derivatives market should incorporate the following guidelines:
- Maximum use of derivatives trading on organized markets
- Maximum use of central counterparties where trading on organized markets is not feasible
- Bilateral collateralization of derivatives exposure (preferably handled by a third party) when organized trading or the use of CCPs is not feasible
- Mandatory registration of open risk positions and reporting standards for all derivative contracts
"A joint effort by market participants, infrastructure providers and regulators is required to strive for a swift and consistent implementation of the blueprint in order to restore and sustainably strengthen market safety and integrity."
* TFUMP is the IOSCO's Task Force on Unregulated Financial Markets and Products
From the white paper:
"While the term 'unregulated financial markets and products' describes different markets and products depending on the jurisdiction, TFUMP has focused on systemically important markets and products that have featured prominently in the current financial crisis and are relevant to the restoration of confidence in international financial markets.
"The overall objective of TFUMP is to recommend ways to redefine the perimeter of regulation and the scope of intervention by regulators. As the interim recommendations of this Consultation Report go beyond the traditional distinctions, such as wholesale/retail, further work is needed to identify the appropriate criteria to be used to redefine the border between what has traditionally been considered regulated and unregulated.
"Additional work may explore the regulatory consequences of a redefinition of the perimeter of the regulation, namely in terms of eligibility of assets, different types of investors, accounting classifications in relation to the work undertaken by IASB on the use of fair value accounting and the criteria for classification of products between the banking book and the trading book.
"The Consultation Report identifies in general terms possible areas for initial and immediate regulatory actions that could be undertaken within the context of the current market situation. The analysis does not expand on the broader systemic risks surrounding the unregulated financial markets and products sector and the means to mitigate any such risk."