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.
The watchdog's first set of determinations on what should be
cleared are likely around November or later.
(Reporting by Huw Jones; editing by Jason Neely)