FACTBOX - EU moves into top gear on financial regulation

Mon Feb 23, 2009 2:09pm GMT

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(Reuters) - The European Union is moving into top gear on financial regulation reform as part of global efforts to apply lessons from the credit crunch and make markets safer for investors.

There is a race to adopt key proposals before the European Parliament holds elections in June and a new European Commission takes up the reins by year end. Most proposals depend on joint approval from parliament and EU states to become law.

The following are the main regulatory steps underway or anticipated in coming weeks as part of wider, global efforts to reform financial markets, the topic of a G20 summit in London on April 2.

BANK CAPITAL RULES EU states have adopted a preliminary reform of the bloc's bank capital requirements or Basel II rules that will introduce a tougher regime for selling securitised products. Parliament is set to vote in committee on March 9 and chances of a joint deal in April look good so far. Once adopted, a second wave of reform will be proposed in the summer that will likely include the introduction of simpler leverage caps and tougher capital requirements on trading books.

CREDIT RATING AGENCIES A draft law that will make registration and direct oversight of credit rating agencies by national securities watchdogs mandatory is now being adopted by EU states and the European Parliament. Hopes of a final deal in April look quite good.

FINANCIAL SUPERVISION

A "high-level" group headed by former Bank of France Governor Jacques de Larosiere is to put forward recommendations for introducing cross-border financial supervision in the EU on February 25.

The European Commission will use the recommendations to form outline proposals for a summit of EU leaders on March 19-20 aimed at giving political momentum for a more detailed reform. The European Central Bank wants a core role in supervising systemic risk among banks.

INSURANCE The Solvency II rules are a sweeping overhaul of how the bloc's insurers ensure they have enough capital to cover risks on their books and how cross-border groups are supervised.

EU states have adopted the reform in principle after scrapping a provision that a cross-border group's home supervisor would have the last word on EU-wide solvency capital levels.

A parliamentary committee has adopted a text which includes this provision, though diluted to some extent. Negotiations between the two institutions are proving difficult, making a deal by April unsure.

HEDGE FUNDS AND PRIVATE EQUITY The European Commission holds a hearing on potential future regulation for the two sectors on February 26-27 before outlining its thinking on "appropriate legislative proposals" in a broader financial services regulation paper on March 4.

CREDIT DERIVATIVES

The European Commission has already begun a broad analysis of the derivatives market in the medium term but in the short term wants central clearing of off-exchange traded credit derivatives this year.

Under the threat of legislation, banks and dealers last week agreed to centrally clear their European credit defaults swaps from July to improve transparency and cut risk.

RETAIL INVESTMENTS

The European Commission is due to publish a White Paper on product transparency and distribution of retail products. It may include a draft directive giving the same type of protection to consumers whether they buy a product directly from an insurer or through an intermediary.

ACCOUNTING

EU has already forced through an easing of the fair value accounting rule used by the bloc's 8,000 listed companies. The European Commission is mulling what other changes could be made to avoid the impact of the credit crunch being exacerbated.

REMUNERATION The EU adopted guidelines in 2004 on how shareholders can have more of a say over how company executives are remunerated but it does not address what the Commission sees as a need to link bonuses with the risks involved.

European Commission President Jose Manuel Barroso told a German newspaper at the weekend that proposals to set up a system that removes the rewarding of failure and "the lust for quick profits" will be presented in April or May after an initial discussion next month with EU leaders.

TOXIC DEBT

Work continues on thrashing out a set of guidelines for EU states on how a "bad bank" could operate in terms of valuing toxic debt and ensuring the EU competition and internal market rules are not distorted.

(Reporting by Huw Jones, editing by Andy Bruce)

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