Alert September 21, 2010

European Commission Proposes Legislation on Over-the-Counter (OTC) Derivatives

Following the publication of two Commission Communications in July and October 2009, the European Commission issued its “Proposal for Regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories” on September 15, 2010.  (The text of the proposed legislation is available at http://ec.europa.eu/commission_2010-2014/barnier/headlines/news/2010/09/20100915_en.htm.)  Like Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the proposed legislation is intended to promote transparency in the OTC derivatives market, reduce counterparty credit risk and reduce operational risk.  Specifically, the proposed legislation would, among other things, mandate clearing for standardized OTC derivatives through central counterparties (“CCPs”).  To avoid CCPs becoming a source of risk to the financial system, the new regime would impose stringent conduct of business and prudential requirements on CCPs.  It would also increase transparency by requiring heightened reporting on OTC derivatives to trade repositories and that such information be accessible to supervisory authorities.  The European Council and the European Parliament must approve the proposal before it becomes law.