In the European equivalent of the Dodd-Frank Act, the European Union’s diplomats and European Parliament agreed to reconstruct the $700 trillion derivatives market. Reform in the European Markets Infrastructure Regulation (“EMIR”) will implement more safeguards on the derivatives market. EMIR is the European Commission’s answer to the G-20 mandate to make new regulation for the over-the-counter (“OTC”) derivatives market.
In the Financial Times, Michael Barnier, Europe’s top financial regulator, called the agreement an end to an era of “shady deals.” He said, “This will considerably increase financial stability and safety in the EU by preventing the situation where a collapse of one financial firm can cause the collapse of other financial firms. We are clearly learning the lesson of the 2008 crisis.”
EU banks, hedge funds, and other derivatives dealers will be encouraged to move away from unregulated OTC markets, which account for 95 percent of trades. Under the EMIR reform, trade repositories will audit OTC derivatives trading. This is intended to prevent the financial system from default, and move control of OTC derivatives from opaque trading systems on Wall Street and large dealer banks in Europe to more transparent systems, viewed by market participants and regulators.
