EU's Barnier voices concern on U.S. derivatives rules

Mon Apr 23, 2012 6:18am EDT

* EU regulation chief warns rules could confuse EU banks

* Barnier writes to Washington asking for delay

By John O'Donnell

BRUSSELS, April 23 (Reuters) - The European Commission has urged regulators in Washington to delay elements of new derivatives regulation, fearing that confusion surrounding some of the rules will harm EU banks operating in the United States.

The U.S. Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) finalised rules last week that will determine which firms involved in trading swaps must register with regulators and back up trades with more capital and collateral.

The Dodd-Frank financial reform law calls on regulators to police the swaps market more closely after widespread ignorance about swaps exposure, especially at insurer American International Group, exacerbated the financial crisis.

The rules are the latest step in a global bid to reform opaque and unpredictable derivatives markets, and follow an EU move earlier this year to overhaul regulation.

Michel Barnier, the European commissioner in charge of financial regulation, is, however, concerned about how the new rules will affect EU firms and has written to the U.S. Treasury, the CFTC and the SEC, asking them to delay certain provisions.

"Commissioner Barnier has sent letters... encouraging them to delay the swap dealer registration process as regards EU firms until there is legal clarity about the substantive conditions that such registration will entail," a spokeswoman for the commissioner said in a statement.

'SWAP DEALERS'

Under the Dodd-Frank Act firms using derivatives must register as 'swap dealers' with the U.S. authorities, a requirement that could apply to EU groups active on U.S. derivative markets.

Brussels is worried that such a requirement would mean EU firms were subject to U.S. rules that would overlap with EU law.

"These EU firms are already subject to strict regulation and supervision in the EU," the spokeswoman added.

"The 'swap dealer registration' rules are creating confusion to EU banks operating in the US, as the substantive conditions that will apply are not yet known."

"The (European) Commission has consistently argued that new global regulation on (over-the-counter) derivatives must be coherent and avoid exposing firms to overlapping or diverging requirements in different jurisdictions," Barnier's spokeswoman said.

The CFTC originally said in December 2010 that firms would be counted as swap dealers if they traded more than $100 million in swaps over a 12-month period.

Following a push by energy firms and big commodity traders, that threshold has been bumped up to $8 billion for most asset classes in an initial phase-in.

Derivatives, such as options, futures and swaps, derive their price from the underlying asset, with such contracts drawn up between parties setting out conditions under which the contract may or may not pay out.

The opacity of the market for such instruments led billionaire investor Warren Buffett to describe them as weapons of financial mass destruction.

The nature of the market for credit default swaps (CDS), for example, made it difficult to predict the fallout of a Greek debt default or similar dramatic event.

Earlier this year, the European Union agreed to overhaul regulation of the roughly $700 trillion derivatives market.

The new regime, which could be largely in place by the end of 2012, will overhaul a market that boomed in the decade before the economic crash and was blamed for amplifying the crisis by hiding risks from regulators.

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