EUROPE: EU Parliament decides stance on derivatives, EU short selling, and investor compensation

Wednesday July 6 2011

Three proposals making derivatives trading less fragile, reducing speculative practices linked to EU short selling and reducing the time for the setting up of investor compensation schemes received Parliament`s backing ahead of negotiations with Member States. For all three texts, the EP shares co-decision powers with Member States.

On the compensation schemes legislation, Parliament voted to add protection to private investors against fraudulent and defaulting investment firms, particularly by adding “bad advice” as a case for claiming compensation. However, MEPs did not follow the Economic Affairs Committee`s suggestion of increasing the guaranteed minimum compensation to Euro 100,000.

The report on EU short selling contains two major innovations. Firstly, it requires traders to settle their uncovered short positions by the end of each trading day. Secondly, it restricts purchases of credit default swap contracts to owners of related government bonds or stakes whose performance is dependent on these bonds. MEPs also inserted a requirement that short sale transactions be reported less often. However, they beefed up the rules to ensure that fines are dissuasive.The report on over-the-counter derivatives, central clearing parties and trade repositories aims to bring greater safety, transparency and stability to the OTC derivatives market. Information on OTC derivative contracts would have to be reported to `trade repositories` and be accessible to supervisory authorities. OTC derivative contracts would need to be cleared through central counterparties, thus reducing counterparty credit risk. A key supervisory role is also envisaged for the new European Securities and Markets Authority.

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