Europe’s Approach to Derivatives Regulation

With this summer’s passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it’s Europe’s turn to address financial regulation. This morning, the European Commission released its Proposal for Regulation on OTC Derivatives, central counterparties and trade repositories.

The proposal seems to look a lot like the Dodd-Frank’s approach by creating a central trade repository, required margins, and required collateral. The proposal follows the commitment from the G-20 that

“All standardised 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.”

The proposal excludes non-financial firms who use derivatives to mitigate risk in their core business from the central clearing requirements.

More analysis to come.


I’m reading through the proposal and the supporting documents.