EU lawmaker panel rejects key derivatives rules

LONDON Mon Feb 4, 2013 4:11pm EST

LONDON Feb 4 (Reuters) - A panel of European Union lawmakers on Monday narrowly rejected a set of new derivatives rules, potentially leading to months of uncertainty for users of regulations instigated during the 2007-09 financial crisis in an effort to make markets safer.

The European Parliament's economic affairs committee meeting in Strasbourg, France, voted 24-20 to rethink the rules, which G20 countries had pledged to introduce after the crisis - in which opaque derivatives played a part.

The lawmakers felt the rules, authored by regulators, failed to reflect accurately a framework law they had already approved.

Committee chair Sharon Bowles, a British Liberal Democrat, accused regulators of "breaching and stretching" the underlying law, but said changes could be "written in an evening" to avoid undue delay for markets.

Lawmakers were concerned that exemptions from the rules for "non-financial" companies, such as airlines, which use derivatives to insure against fuel price increases, were worded too restrictively and could damage hedging in the economy.

Some lawmakers, however, warned that the EU's commitment to fulfil G20 pledges would be questioned by the United States and others if the rules had to be reworked.

"We are in unchartered territory. We don't know where we are heading," said Werner Langen, a German centre-right lawmaker who supported rejection of the rules.

The vote is a slap in the face for the EU's executive European Commission, which had endorsed the measures. Patrick Pearson, a Commission official, dismissed the challenges.

If full parliament backs the committee, the Commission and the European Securities and Markets Authority will have to propose alternatives, leaving banks, markets and companies guessing over how to prepare.

The G20 group of the world's biggest advanced and developing economies had pledged to introduce the rules by the end of 2012 but there have been delays in the EU and United States, where most of the world's $640 trillion derivatives are traded.

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 backup if any parties run into financial difficulty.

Companies that use derivatives to hedge against adverse moves in raw material prices or interest rates have been given exemptions from clearing their derivatives if the value is below a threshold set by regulators.

The lawmakers said the threshold would be triggered too quickly because it was based on gross positions and want to use netted positions.

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

It was the first time parliament has used certain powers given to it under a revised EU treaty to challenge implementing measures for a law, a sign of how it is becoming more assertive.

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