Industry groups comment on EU's OTC derivatives proposals

The global hedge fund industry group, the Alternative Investment Management Association, and the International Swaps and Derivatives Association, which represents participants in the privately negotiated derivatives industry, commented today on European Commission proposals for OTC derivatives, credit default swaps (CDS) and short selling.

In short, the European Commission put forth rules that it says would introduce more transparency to the OTC derivatives markets, while it concurrently adopted a proposal to regulate short-selling and CDS.

From a press release issued by the ISDA...

ISDA Comments on Proposals Released by the European Commission Relating to Markets Infrastructure and Aspects of CDS

LONDON, Wednesday, September 15, 2010 – The International Swaps and Derivatives Association, Inc. (ISDA) today made the following statement regarding the proposals by the European Commission on markets infrastructure and aspects of CDS:

"The European Commission’s proposals on market infrastructure for OTC derivatives are of great importance to the health of our economies and stability of the financial system.

"Strong and efficient derivative markets enable our public authorities, companies and pension funds to manage and limit financial risks. This is key to supporting overall economic growth.

"ISDA fully supports increased central clearing where this reduces counterparty risk in the financial system. This calls for robust and resilient standards for clearing houses and a carefully judged approach to identification of derivative contracts that are appropriate for clearing. We also welcome moves to increase transparency of derivatives markets to supervisors through internationally consistent reporting to trade repositories.

"ISDA will continue to work closely with EU regulators to build on the history of commitments delivered to date in clearing more products, standardization, strengthened market infrastructure and increased transparency. We will continue to seek ways to make markets safer and more efficient."

With respect to the European Commission’s proposals on short selling and aspects of CDS, ISDA made the following statement:

"Credit derivatives play a vital role in supporting investor confidence in government debt markets. They enable investors to manage their risks and so contribute to market liquidity and lower funding costs.

"ISDA supports steps taken in the proposals to increase transparency to regulators and safeguards to ensure any proposed measures take account of the need to preserve market liquidity."

From a press release issued by the AIMA...

AIMA responds to new European Commission proposals on short selling and OTC derivatives
15 September 2010

The Alternative Investment Management Association (AIMA) – the global hedge fund industry association – says the proposals on short selling and over-the-counter (OTC) derivatives published today by the European Commission could help remove uncertainty and confusion in the market.

However, AIMA said the proposals contained a number of flaws that it hoped would be addressed. The short-selling proposals, which apply to credit default swaps (CDS) as well as to publicly traded securities, will create harmonised, pan-European rules on short selling, while the OTC derivatives reforms will mandate central clearing of eligible contracts.

AIMA CEO Andrew Baker said: “In the interests of international regulatory consistency it is desirable that the Commission is harmonising rules in both these fields. One of the major problems that the industry has faced in respect of short-selling regulation was that some EU jurisdictions acted unilaterally and arbitrarily in imposing and then lifting bans. A common regime that concentrates on reporting rather than bans is the way forward.

“We are also glad that the Commission has acknowledged that short selling enhances market liquidity and aids price discovery. We do hope however that new powers to ban short selling are never used. Such bans have never worked, and indeed all the evidence is that the shorting bans during the crisis made the situation even worse. And while we support increased transparency in the field of short-selling, we think short position reporting by individual firms should be only to the regulator. The market should receive aggregate position reporting only.”

AIMA also welcomed the fact that sovereign CDS will continue to be permitted under the new regulations. “Sovereign CDS have entirely legitimate hedging uses,” said Mr Baker.

Many aspects of the draft regulations on OTC derivatives are to be supported, AIMA said. “There is a strong financial stability argument for increased transparency in derivatives settlement, so we do support mandatory central clearing, even though it would mean increased costs for the industry,” said Mr Baker.

“Harmonising requirements for the establishment and operation of central counterparties (CCPs) and trade repositories would also appear sensible,” said Mr Baker. “But we are concerned about the implications for E.U. hedge fund managers that use non-E.U. CCPs. The regulation expects ‘third country’ CCPs to meet stringent conditions in order to be able to serve E.U. managers. This measure is potentially protectionist and we would urge European lawmakers to rethink it,” said Mr Baker.

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