Derivatives dealers should not be allowed to own stakes in central counterparties or their risk management systems, and CCPs should not be allowed to compete with each other, according to advice from the European Parliament’s committee on economic and monetary affairs (Econ).
The advice – known as an ‘own initiative’ report – was circulated to committee members by rapporteur Werner Langen on February 11 and will be provided to members of parliament to inform their vote on forthcoming European Commission legislative proposals on derivatives markets.
The EC is expected to introduce its legislation into parliament mid-year. The Langen report will be translated from the original German version and presented to Econ for consideration on February 22, with amendments due by March 1.
In addition, the report also mandates that all CDS contracts be subjected to independent central clearing – the EC’s proposals and other global legislative proposals have only called for standardised contracts to be cleared. The advice adds that individual types of derivatives with “cumulative risks” should be subject to special requirements or, in some cases, banned outright.
The report’s author, Werner Langen, was heavily criticised by industry lobbyists, who attacked the consultation process for being too narrow. According to industry sources, Langen declined to meet with any financial institutions, or canvass their opinions, only meeting with one European derivatives exchange and a few German corporates.
If parliament members vote in line with the advisory, it would force dealers to divest stakes in clearers Ice Trust and LCH Clearnet – an outcome condemned by bankers.
The demand echoes proposed legislation in the US, where the House of Representatives passed the Wall Street Reform and Consumer Protection Act in December, which contained a clause known as the Lynch Amendment. It would restrict major swap participants and dealers to collectively owning a maximum of 20% of a clearing house.