* Watchdog suggests 8-9 month respite as new rules loom
* Changes aimed at making $700 trillion market safer
(Adds more detail, derivatives industry reaction)
By Huw Jones
LONDON, May 8 Banks should get a breathing space
of a few months to adjust to coming new rules on the clearing of
derivatives deals, a top European Union regulator proposed on
The new rules, designed to make markets safer, will require
banks to pass more derivatives transactions in Europe through
clearing houses - third parties which are backed by a default
fund in case one side of the trade goes bust. Uncleared deals -
known as over-the-counter (OTC) - will attract higher charges
because of the increased risk.
But the rollout has created legal uncertainty for many banks
over 'frontloading' - the risk that contracts they issue now may
have to be cleared later, leaving them unsure how to price the
The global derivatives market is worth around $700 trillion,
with London and New York the biggest centres.
The European Securities and Markets Authority (ESMA), the
watchdog rolling out the new derivatives rules, asked the EU's
executive Commission on Thursday to give banks some temporary
leeway to avoid legal grey areas.
ESMA Chairman Steven Maijoor said this was needed to avoid
bumping up compliance costs, and to stop some market players
being tempted not to use derivatives to hedge or insure against
risks during the period of uncertainty.
"Given the urgency... an early reaction would be greatly
appreciated," Maijoor said in a letter to EU financial services
commissioner Michel Barnier.
ESMA is proposing a breathing space of about 8 months so
that derivatives entered into from March 18 until around
November would not 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.
The International Swaps and Derivatives Association (ISDA),
a global industry body, said ESMA's approach should eliminate
much of the uncertainty for derivatives end-users.
"ESMA's proposal looks to be a practical way of removing
some of that uncertainty by clarifying that frontloading for
eligible contracts will only apply once participants know which
products will be subject to a clearing obligation, and when that
mandate will begin," ISDA said in a statement.
(Reporting by Huw Jones; editing by Mark Trevelyan)