* European Parliament pushes countries to bolster EU
* New rules to control $700 trillion market planned for this
* Law set to put derivatives under the watch of regulators
(Adds details, background, comment from official)
By John O'Donnell
BRUSSELS, Jan 31 European lawmakers and
diplomats clashed on Tuesday over new rules to overhaul the $700
trillion derivatives market, threatening to delay one of the
centrepieces of European financial reform.
The dispute centres on how much power should be given to an
EU agency to oversee derivatives, one of the most opaque areas
of finance, and once described as "financial weapons of mass
destruction" by billionaire investor Warren Buffett.
Derivatives boomed in the decade before the economic crash
and were blamed for amplifying the crisis by hiding risks.
But writing laws to regulate them in Europe has divided the
region's top powers - Germany, France and Britain - with Britain
keen to protect the City of London, which accounts for 9 percent
of Britain's economy and dominates the derivatives market,
alongside New York.
EU ministers agreed last week to a mechanism that could
limit powers given to the European Securities and Markets
Authority (ESMA) but the dispute has now spilled over into talks
with the European Parliament which has to give its approval.
The parliament is keen not to curb ESMA's powers and wants
to change the voting mechanism that could limit its influence.
"Parliament wants a strong role for ESMA whereas some member
states are reluctant to give too much power to the supervisor,"
said one official, speaking on condition of anonymity.
Any delay would be a blow to the European Union's efforts to
reform finance, a drive which analysts believe has lost its way
as the bloc continues to grapple with problems in the banking
industyr and with a sovereign debt crisis.
The United States has been quicker to implement controls,
establishing a regulatory framework in 2010 for derivatives,
such as those that hedge the risk from price moves on oil, gas
or other commodities' markets.
Under the new EU regime, which could be in place by the end
of 2012, banks, hedge funds and other financial institutions
that buy and sell derivatives will be encouraged to move away
from the unregulated 'over-the-counter' market, which accounts
for more than 90 percent of trades.
It has been common in the past for contracts to be recorded
by no more than a fax, with only the parties involved aware of
Instead, trading will be standardised so that it happens on
open exchanges and settlement will be cleared centrally. Those
that do not shift to exchanges will face higher charges to
reflect the extra risk.
The new rules mean that all deals, whether on or off
exchange, must be recorded, which supervisors hope will make it
easier to monitor the market and intervene to avoid a repeat of
the chaos surrounding the 2008 collapse of Lehman Brothers.
"This should prevent another Lehman, whose collapse left
those who had signed up to derivatives deals with it carrying
the costs," said Graham Bishop, an expert on European financial
"The biggest change is that derivatives will be standardised
and cleared centrally - as far as reasonable. That means that
capital will have to be retained to cover the risk of these
transactions," Bishop added.
The derivatives market is largely organised by fewer than 20
banks and frequently involves institutions designing specialised
products for specific client needs. For example, a bank might
design a derivative that helps an airline hedge again the risk
of a sharp jump in the price of airline fuel.
By definition, derivatives are any financial product, such
as an option, future, swap or forward, that derives its price
from the underlying asset. A derivative contract can be drawn up
between two parties setting out specific variables, including
conditions under which the contract may or may not pay out.
Because the market for credit default swaps (CDS), like
other derivatives, is unregulated, it has made it difficult to
predict how that product would respond to a Greek default or
similar dramatic event.
Under the new rules, which were discussed with industry for
a year before negotiations moved to the parliament and EU member
states, all CDS trades would be recorded, making such
(Reporting By John O'Donnell; Editing by Helen Massy-Beresford
and Elaine Hardcastle)