LONDON May 8 Banks would not have to clear some of their derivatives transactions during the roll out of new rules aimed at making markets safer under a proposal put forth by a top European Union regulator on Thursday.
The introduction of new EU rules this year which require clearing of some types of derivatives transactions has created legal uncertainty for many banks over so-called frontloading.
This refers to contracts in issue that may have to be cleared later on, creating a legal uncertainty which also left banks unsure how to price the derivatives.
Uncleared trades will face higher capital charges as they are deemed riskier than cleared trades, which pass through a third party backed by a default fund in case one side of the trade goes bust.
"This lack of legal uncertainty... introduces new risks and increases compliance costs for counterparties," Steven Maijoor, chairman of the European Securities and Markets Authority (ESMA) said in a letter to the bloc's executive European Commission.
ESMA is proposing an 8-9 month breathing space so that derivatives entered into from March 18 until around November won't have to be cleared even if ESMA decides by then that those types of contracts must be cleared in future.