Brussels proposes new regulations for derivatives

The European Commission yesterday brought legislative proposals to strengthen the regulation of derivatives, for a better regulation of derivatives transactions and short sales.

The authorities in Brussels are proposing increased transparency and security of derivatives transactions in the European Union. Thus, the Commission wants short sellers of bonds and stocks to provide more information on the transactions and to provide guarantees that they can deliver the securities. Short selling allows traders to sell securities they do not own in hope of being able to buy them back later at a lower price.

The bill concerning short-selling requires traders to disclose large net short positions to regulators once these amount to 0.2% of the issued share capital of a company, and disclose them to the market once they exceed 0.5% per cent.

The Commission also wants to require most of the OTC products to go through central clearing houses, which would ensure the safety of the trades.

The proposal of the EU concerning the centralized clearing of derivatives is just one element of a package of laws intended to toughen regulation in the sector after the financial crisis which affected the entire world.

"In troubled markets, short-selling can amplify price declines, generating chaos and systemic risk.

In troubled markets, short selling can amplify price declines, generating disorder and systemic risk", said Michel Barnier, the European internal market commissioner. The European official said: "No financial market can afford

No financial market can afford to remain a wild west territory. OTC derivatives have a major impact on the real economy, from mortgages to the price of food products".

The derivatives markets have seen a rapid growth over the last years, as oversight is extremely limited.