EU parliament in talks to challenge new derivatives rules

LONDON Mon Jan 21, 2013 8:19am EST

LONDON Jan 21 (Reuters) - The European Parliament may demand a rethink of new rules designed to make derivatives markets safer in the wake of the financial crisis, potentially leading to months of uncertainty for banks that are big users of these products.

Members of the Parliament are discussing a resolution which, if approved next month, would trigger a formal review of the rules, two sources from the European Parliament said.

"The draft resolution is being put together now. There are legitimate concerns," one of the parliamentary sources said.

The issue is with exemptions from the rules for "non-financial" companies, such as airlines, which use derivatives to hedge fuel costs.

If the Parliament approves a resolution rejecting some of the rules, the European Commission and the European Securities and Markets Authority (ESMA) will have to come up with alternatives, which could leave banks and markets guessing what they should prepare for.

The rules are a response to an international push to make derivatives markets more secure after the crisis by introducing central clearing for certain products.

Clearing ensures a derivatives trade is completed and provides back up if any parties run into financial difficulties. It also introduces greater transparency for these opaque markets, which was lacking when U.S. bank Lehman Brothers went bust in 2008.

But the Parliament considers that exemptions for users of derivatives from the "real economy," such as airlines, are not flexible enough.

Airlines, for example, which use derivatives to insure against spikes in jet fuel prices, have been given exemptions from clearing the derivatives if their value is below a threshold set by regulators.

Members of the European Parliament say the threshold has effectively been set at too low a level.

They also object to non-financial firms having to clear all classes of derivatives even if they only hit the clearing threshold in one asset, such as commodities.

If the Parliament goes ahead with its challenge to the rules, this would be the first time it has used certain powers under European Union law, a sign that it is becoming more assertive.

The United States also needs to finalise some of its derivatives rules and regulators globally are holding meetings to iron out overlaps between rules from different jurisdictions.

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