European Union to ease its financial derivatives rules

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financial derivatives

The European Union has proposed easing its derivatives rules in a move which will save pension funds billions of euros, as it seeks to boost its capital markets union (CMU) after Britain’s decision to leave the bloc.

New rules were introduced in 2012 after the then opaque sector accentuated the 2007-09 financial crisis, but policymaker focus has by now shifted to helping the “real economy” create jobs by cutting red tape for companies and investors, though not for big banks.

The European Commission proposed a draft law on Thursday to continue shielding pension funds – a sector it sees as critical for investment in infrastructure – from having to clear their derivatives trades for a further three years, saving them billions of euros in collateral requirements.

“Our aim is to simplify rules as well as to eliminate disproportionate costs and burdens to small companies in the financial sector, corporates and pension funds,” European Commission Vice President Jyrki Katainen, said in a statement.

Brussels is trying to encourage companies to use markets to raise funds and wean them off their heavy reliance on bank loans.

But CMU has made slow progress, suffering a knock after Britain, by far the EU’s biggest capital market, decided to leave the bloc in 2019. Efforts to revive securitisation, a form of debt security, have also stalled.

Thursday’s plans, which need approval from the European Parliament and EU states to become law, are among the first after a root-and-branch review in 2015 of crisis-era financial rules.

Only one side of a derivatives trade would have to report it, helping to cut compliance costs.

The commission said such changes could save market participants, especially energy companies and manufacturers, up to 2.6 billion euros in operational costs and up to 6.9 billion euros in one-off costs.

Brexit has also prompted the commission to look again at how derivatives are cleared, a process carried out by a third party to ensure a trade is completed.

The commission said it intends to present further legislative proposals before the summer to address “important and emerging” challenges in derivatives clearing.

“In this context, it should also ensure effective supervisory arrangements for clearing houses located outside the EU that clear substantial volumes of derivatives denominated in EU currencies and play a key systemic role for EU financial markets.”

Euro zone policymakers have said that the bulk of clearing of euro-denominated securities like derivatives and bonds should move to the single currency area.

The London Stock Exchange’s LCH clearing house clears most euro-denominated trades, but this activity will be outside the bloc’s legal framework after Brexit.