EU derivatives plans focus on clearing

By Huw Jones

LONDON (Reuters) - Centrally clearing the bulk of off-exchange derivatives contracts will be the core of Europe's efforts to cut risk in the sector as further study is needed before forcing any trades onto exchanges, an EU document said.

The document is a draft of the EU executive European Commission's plans to make the over-the-counter derivatives market safer after the credit crunch rang regulatory alarms. OTC contracts range from credit default swaps (CDS) to interest rate, equity-linked and commodity contracts. The G20 group of industrialised and emerging countries agreed in April that CDS transactions should be centrally cleared.

The collapse of investment bank Lehman Brothers and troubles at insurer AIG (AIG.N) and Bear Stearns bank showed regulators how little they knew about the $600 trillion sector.

"The opaqueness of the market prevented, on the one hand, other market participants from knowing exactly what the exposures of their counterparties were to these three entities, which resulted in mistrust and in the sudden drying up of liquidity," the document obtained by Reuters said.

The document has proved contentious and been subject to rewrites.

EU Internal Market Commissioner, Charlie McCreevy, had planned to publish to document this week but a Commission source said it has been put off to an unspecified date.

The document says standardisation of contracts -- a process already underway -- is a prerequisite for central clearing, as well as setting up a central data depositories.

The plans will be a relief to dealers as they stop short of more radical steps envisaged by the United States which seek to go beyond centrally clearing OTC trades to shift trading onto exchanges or trading platforms where possible.