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Felix Shipkevich February 3, 2012

EU policymakers and diplomats have locked horns over the scope of the ESMA, the European Securities and Markets Authority. ESMA is at the heart of derivatives reform in Europe, and has created a standoff between derivatives-dependant Britain and the Continental powers Germany and France.

Last week, EU ministers agreed to create a system limits the powers granted to ESMA. But the debate has been reenergized in the European Parliament, which also must give the reform bill its stamp of approval. Parliamentary powers are not enthusiastic about restrictions of ESMA’s power, and are seeking to revise the voting mechanism which would hold the agency in check.

“Parliament wants a strong role for ESMA whereas some member states are reluctant to give too much power to the supervisor,” said one official, who wished to remain anonymous. Renegotiating the scope of ESMA’s authority will further delay the bill, a risky move for a region already in the throes of a sovereign debt crisis. The United States completed its derivatives reform bill in July 2010, though various federal regulators are still refining new derivatives rules and definitions.

As it currently stands, ESMA will move the majority of derivatives transactions out of the opaque “over-the-counter” market on to regulated, transparent exchanges. These regulatory regimes will come with record-keeping and reporting requirements. Those parties that do not switch to the new exchanges will face higher charges to compensate for the perceived added risk. EU regulators believe this increase in transparency will prevent systemically important institutions from collapsing, as happened with Lehman Brothers in 2008. “The biggest change is that derivatives will be standardised and cleared centrally – as far as reasonable. That means that capital will have to be retained to cover the risk of these transactions,” explained one European financial policy analyst.

Read more about ESMA.

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