13 Financial services
| (30788)
11873/09
+ ADDs 1-2
COM(09) 332
| Commission Communication: Ensuring efficient, safe and sound derivatives markets
|
| Legal base | —
|
| Department | HM Treasury
|
| Basis of consideration |
Minister's letter of 26 October 2009
|
| Previous Committee Report
| HC 19-xxvi (2008-09), chapter 7 (10 September 2009)
|
| To be discussed in Council
| None planned |
| Committee's assessment |
Politically important |
| Committee's decision |
Cleared |
Background
13.1 Following the financial and economic crisis the Commission
has, at the behest of the European Council, been examining the
need for and presenting various proposals relating to the financial
services sector. We last reported on these activities, in relation
to proposals for overarching regulatory and supervisory bodies
earlier this month.[46]
13.2 The Commission published this Communication,
in July 2009, to launch a public consultation on ensuring efficient,
safe and sound derivatives[47]
markets. It called for responses by 31 August 2009 and planned
a public hearing on 25 September 2009. It intended, on the basis
of the consultation, to present proposals, if justified legislative
ones, by the end of the year. In the Communication, which was
accompanied by two detailed staff working documents, the Commission
outlined the uses of derivatives and an interpretation of how
derivatives had contributed to the current economic climate. It
looked towards possible solutions for improving financial stability
and reducing systemic risk, in particular counterparty risk, that
is the risk that one side of a transaction will not honour its
obligations.
13.3 When we considered the document, in September
2009, we heard that:
- the Government welcomed the
Commission proposals for enhancing the resilience of over the
counter derivatives markets;
- it agreed that some aspects of over the counter
derivatives markets had exhibited weaknesses during the crisis;
- it was of the view that appropriately risk-managed
and transparent over the counter derivatives markets had a valid
role to play in today's global financial markets and careful consideration
was needed to ensure that market participants were not deterred
from using the financial instruments which most effectively manage
the risks of their business;
- it agreed with the broad aims of the Commission's
proposals, saying that the principal objectives of regulatory
reform should be designed to reduce risk within the financial
system, to improve overall transparency and to maintain financial
stability;
- it considered that, in order, to achieve these
objectives four key issues needed to be addressed — increased
standardisation of contract and economic terms, greater use of
central counterparty clearing for clearing-eligible products,
strengthened risk management for non-central counterparty-cleared
products and increased transparency to the market and to regulators;
and
- it thought there were key methods that public
authorities could use to help ensure that these objectives were
met — application of risk-appropriate capital requirements,
authorities continuing to work with market participants to analyse
shortcomings in existing arrangements, to explore specific options
for reform and to ensure that reforms were made and if, following
analysis by the authorities, market-led initiatives were found
not to have achieved the public policy objective, taking well-targeted
regulatory and legislative measures.
We also heard that the Treasury and the Financial
Services Authority were producing a joint response to the Commission
Communication.
13.4 We commented that clearly, whilst some measures
would emerge from the Commission's consultation process, they
would need to be carefully calibrated and fully justified by cost
benefit analysis. We would, in due course, consider any such measures
that require Community legislation with that need in view. Meanwhile,
we asked, before considering the present document further, to
see the Government's response to the Commission Communication
and to hear about the Commission's public hearing of 25 September
2009. The document remain under scrutiny.[48]
The Minister's letter
13.5 The Financial Services Secretary to the Treasury
(Lord Myners) now sends us a copy of the Treasury and the Financial
Services Authority's joint response to the consultation. We annex
the executive summary. As for the Commission's public hearing
the Minister tells us that an account of this has been provided
by the Commission with a combination of videos, a speech transcript
and presentation notes on its website.[49]
(Summaries of stakeholder views and of the conference and presentations
can be found on the Commission's website).[50]
He continues that following this event the Commission has now
published its proposals on future policy actions to strengthen
the safety of derivatives markets (which we will be scrutinising
in due course).[51]
Conclusion
13.6 We are grateful to the Minister for this
information and, given that this document is overtaken by the
new Communication awaiting our scrutiny, we now clear it.
Annex: Joint UK Financial Services
Authority and HM Treasury response to EU Consultation Document:
Possible initiatives to enhance the resilience of OTC derivatives
markets
Executive Summary
The UK Financial Services Authority and HM Treasury
(the "UK Authorities") welcome the proposals of the
Commission for enhancing the resilience of the OTC derivatives
markets. We agree that these markets have exhibited weaknesses,
specifically in terms of counterparty risk management and market
transparency, and that appropriate steps need to be taken to strengthen
these aspects in order to safeguard financial stability.
In this response we outline the key steps identified
by the UK Authorities to strengthen the OTC derivatives markets.
By ensuring that market participants have access to an appropriately
robust, resilient and transparent market, authorities can help
to improve confidence and financial stability both in the OTC
derivative markets and broader financial sector.
Below we also discuss the key tools available to
regulators to drive change to achieve this objective. These are:
- The application of capital charges that are proportionate
to the risks assumed;
- Market-led initiatives which are closely overseen
and monitored by regulators; and
- Further legislative/regulatory action.
In seeking to enhance the resilience of the global
OTC derivatives markets using these tools, it is vital that the
current efforts to promote international coordination and consistency
are continued. A consistent approach to the key issues across
major jurisdictions will be necessary to avoid the potential for
regulatory arbitrage and the efforts of authorities being compromised.
It is therefore vital that EU policy makers continue to engage
with their counterparts in other jurisdictions, notably the US,
in order to promulgate a consistent framework.
To avoid duplication, consideration of further initiatives
should also take into account the considerable work already underway,
especially with respect to the reassessment of capital charges
under the Basel framework and initiatives led by both the market
and regulatory community. Due to the range of workstreams both
in train and those likely to arise as a consequence of increased
regulatory engagement, it is important that appropriate prioritisation
is discussed and agreed between the relevant stakeholders. This
prioritisation should endeavour to ensure the most effective deployment
of resources by both industry and the regulatory community as
well as taking into account the differences across the asset classes
and appropriate timetabling.
In addition, whilst some jurisdictions may face individual
challenges, it is important that location-neutral policies which
encapsulate the principles of open cross-border competition and
market efficiency are pursued. These markets are, and should remain,
global markets.
46 (30950)-(30957) 13645/09, 13648/09, 13652/09-13658/09:
see HC 19-xxx (2008-09), chapter 2 (4 November 2009). Back
47
Derivatives are financial contracts that trade and redistribute
risks - their value is "derived" from an underlying
financial instrument, commodity, market variable, service etc. Back
48
See headnote. Back
49 See http://ec.europa.eu/internal_market/financial-markets/derivatives/index_en.htm.
Back
50
See http://ec.europa.eu/internal_market/consultations/2009/derivatives_en.htm.
Back
51
See http://register.consilium.europa.eu/pdf/en/09/st15/st15047.en09.pdf.
Back
|
