British lawmakers have backed preliminary European Union plans to crack down on derivatives markets but warned that supervision of clearing houses must remain under national control.
London is by far Europe's biggest derivatives centre, accounting for 39 percent of the world's interest rate contracts and 44 percent of foreign exchange derivatives trading.
A committee from Britain's upper house of parliament uncovered no evidence that derivatives were directly responsible for the worst financial crisis since the 1930s but found that more safeguards were needed.
"The derivatives market has important economic and commercial value. However, it is a massive industry that has the potential to destabilise the financial system in the EU unless it is properly regulated," said Janet Cohen, chair of the sub-committee that authored the report.
The EU's executive European Commission is due to formally propose a draft law in June based on pledges it made at the G20 group of leading countries last year.
By the end of 2012 as many contracts as possible should be standardised so they can be centrally cleared to cut risk and improve transparency.
Contracts would be traded on an exchange, where appropriate, and non-cleared contracts would face higher capital charges.
All in the details
British lawmakers are concerned over how the EU will flesh out some of the G20 pledges.
"We note that not all products can be standardised and that room must be left, in an efficient market, for bespoke derivatives that meet the specific needs of corporates," the report said.
Companies, like airlines which use bespoke derivatives to cover the risk of adverse price moves in fuel, have been lobbying Brussels and the United States, which is adopting similar measures, for exemptions from clearing.
"Legislation should avoid forcing these products through clearing as this may increase risk in the system if a CCP (central counterparty) cannot effectively manage the risk associated with a product," the report said.
The report repeated Britain's call for clearing houses to be regulated by the country they are located in rather than on a pan-EU basis, as the Commission has indicated.
"We found that in the absence of any cross border fiscal burden sharing arrangements for failing financial institutions, central counterparites cannot be supervised at an EU level because the EU does not have the financial resources within the budget to bail out a large central counterparty," the report said.
Britain obtained backing from EU leaders last year that a planned new EU markets supervisory authority would not be responsible for authorising and supervising clearing houses.
ReutersGüncelleme Tarihi: 31 Mart 2010, 19:21