New authority will conduct cost-benefit analysis to decide which derivatives should be cleared - but G-20 deadline is not negotiable, says Esma chair in first public speech While European market supervisors have yet to identify which over-the-counter derivatives should be eligible for mandatory clearing and for trading on exchanges, the new European Securities and Markets Authority (Esma) is committed to the end-2012 deadline set by Group of 20 (G-20) governments for reform of financial markets, Esma chairman Steven Maijoor told the Isda AGM in Prague today, in his first public speech in the role. Esma is one of the three new market supervisory authorities set up by the European Union at the start of this year, as recommended by the de Larosière report in 2009. Maijoor was previously the managing director of the Dutch markets regulator, the AFM. The three new European authorities - which replace the three EU advisory committees, and have new powers to go with it - are charged with preventing "inadequate risk management, inappropriate remuneration practices, and insufficient transparency". One of Esma's key tasks is identifying the classes of derivatives eligible for mandatory clearing - much debate continues to swirl around a possible exemption for foreign exchange products, but Maijoor gave no clues about the Esma stance. "At this stage I cannot say for which classes of derivatives the clearing obligation will apply," said Maijoor. He reassured the audience that a cost-benefit analysis would be applied to each class of derivatives under consideration - and said there would also be a public consultation. "I fully understand the wishes of the industry for flexibility. However, flexibility should not result in risks to the stability of financial markets." Despite the progress made on the post-trading environment for derivatives, supervisors still have a lot of work to do on the trading environment itself, said Maijoor. The European Commission recently published its consultation on the Markets in Financial Instruments Directive review, in which it proposed that all trading in derivatives eligible for clearing and sufficiently liquid should move to regulated markets, MTFs or other organised trading facilities. "I think we all share the view that there are limits to what can actually be traded on these types of organised platforms," said Maijoor. Regulators cannot simply take a "copy-paste" approach to the OTC derivatives market by carrying across standards used in equity markets, he said. However, he was also clear that a key objective of the new authority is to ensure genuine change in the OTC derivatives business. "The structure and functioning of the OTC derivatives market played a major role in amplifying and spreading the risks entrenched in the financial market," Maijoor said. "While we all still recognise the importance of OTC derivatives, we have also become more aware of their limitations and risks."...
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