EDINBURGH/LONDON (Reuters) - The European Union is expected to make clearing of interest rate swaps mandatory from later this year, its securities market watchdog said on Thursday.
The 28-country bloc is rolling out rules to make derivatives safer and more transparent after their opacity exacerbated the 2007-09 financial crisis.
Mandating clearing of interest rate swaps (IRS), which account for 80 percent of the world’s $690 trillion derivatives market, means they would have to pass through a third party which guarantees the completion of the trade even if one side goes broke.
Steven Maijoor, chairman of the European Securities and Markets Authority, told a pensions conference that the watchdog had completed an analysis of the interest rate swaps market and had recommended that the European Commission endorses mandatory clearing.
“I would hope before the end of the year they will start to apply a central clearing obligation,” Maijoor said. “This upcoming central clearing obligation should result in a significant reduction of systemic risk in Europe.”
Mandatory clearing of IRS would be phased in for different users, with pension funds coming into the net in 2017. Pension funds use interest rate swaps to cover the risk of unexpected rate shifts hitting their investments.
Maijoor told Reuters on the sidelines of the conference that credit default swap indices would be next in line for mandatory clearing, most likely in 2016.
Hans Hoogervorst, chair of the International Accounting Standards Board and speaking on the same panel, said mandatory central clearing was long overdue.
“Moving to central clearing has been one of the right responses to the crisis ... it’s a mistake we didn’t do it sooner,” he told a Q&A session.
Jonathan Hill, the EU’s financial services chief, told the same conference that the 2017 start date for pension funds to post initial margins on cleared trades could be extended by a further year.
Pension funds have resisted paying a margin, saying the cost would ultimately erode returns for investors.
A margin acts like a safeguard against losses and Hill said any extension after 2018 would require legislative changes. “While it’s too early to take a decision on that, I will be launching a review of the legislation shortly which will itself provide the opportunity for us to consider this further,” Hill said.
Regulators like Hill are becoming more flexible in applying rules introduced in the aftermath of the crisis if it helps boost growth. Pension funds are a key target for Hill’s capital markets union plans to channel more money into infrastructure spending.
“The last five years have been a period of highly intensive rulemaking but there is another threat to financial stability in Europe and that is the lack of jobs and growth,” Hill said.
Reporting by Carolyn Cohn; Writing by Huw Jones; Editing by Pravin Char and Ruth Pitchford