Derivatives

Derivatives play an important role in the economy but are associated with certain risks. The crisis has highlighted that these risks are not sufficiently mitigated in the over-the-counter (OTC) part of the market, especially as regards credit default swaps (CDS). Since the beginning of the financial crisis, the Commission has been working to address the most urgent of these risks.

In October 2008 the Commisison called a meeting with the industry and European regulators to discuss two sets of objectives:

• to have concrete proposals as to how the risks from credit derivatives can be mitigated; in particular, he asked for ambitious plans for moving CDS on to central clearing facilities;
• more generally, to have a systematic look at derivatives markets in the aftermath of the lessons learned from the crisis.

In addition, in the Communication of 4 March 2009 on Driving European recovery the Commission committed to deliver, on the basis of a report on derivatives and other complex structured products, appropriate initiatives to increase transparency and to address any financial stability concerns.

On 3 July 2009 the Commission adopted a Communication on ensuring efficient, safe and sound derivatives markets. The Communication looks at the role played by derivatives in the financial crisis and at the benefits and risks of derivatives markets, and assesses how risks can be reduced. It is accompanied by a Staff Working Paper, which contains an overview of (ⅰ) derivatives markets, (ⅱ) OTC derivative market segments, and (ⅲ) an assessment of the effectiveness of current measures to reduce risks, notably as regards CDS.

On 20 October 2009, the Commission adopted a second Communication that sets out the future policy actions the Commission intends to propose to increase transparency of the derivatives market, reduce counterparty and operational risk in trading and enhance market integrity and oversight.

Legislative Proposals

On 15 September 2010, the Commission adopted a Regulation on OTC derivatives, central counterparties and trade repositories. The Regulation introduces a reporting obligation for OTC derivatives, a clearing obligation for eligible OTC derivatives, measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives, common rules for central counterparties (CCPs) and for trade repositories, and rules on the establishment of interoperability between CCPs.

• Press Release 
• FAQs
• Proposal
• Impact Assessment:
  • Full Text 
  • Summary 

Consultations

Commission Communications

Conferences

Conference: Derivatives in Crisis – Safeguarding financial stability

CCP clearing of credit default swaps

31.07.2009	Major step towards financial stability: European market for credit default swaps becomes safer (IP/09/1215)
17.02.2009	Letter of commitment from major dealer banks to clear European-referenced credit default swaps on one or more European CCPs  List of signatories (updated in May 2009)