The European Commission proposes rules on OTC derivatives; some similarities to US rules but also some differences.
Following in the footsteps of Dodd-Frank, the EU’s European Commission Wednesday issued rules to make the derivatives trading more transparent and to put some limits on short selling. For the most part, corporations are spared of any major hits by the new proposals.
Most of the similarities in the two sets of regulations are, of course, when it comes to OTC derivatives dealers and other financial counterparties. But for non-financial companies what is important is that, like Dodd-Frank, they won’t be obligated to use central clearing if they are using derivatives to mitigate risk “arising from their core business activities” hedging against swings in foreign exchange markets.
Both sets of regulations have the same reporting requirement for non-financial companies, although the EC said reporting will be necessary if a transaction exceeds a certain threshold (yet to be determined). Similar margin requirements apply: the EC said, again, they apply only if the transaction exceeds a certain threshold; for Dodd-Frank they apply only if one side of the deal is a major swap or dealer. Capital requirements are also comparable, with EC proposing them for transactions of a certain size, while Dodd-Frank said it would be only if the transaction included a major swap participant.
One possible big difference, aside from the EC’s stance on limiting certain short sales (Dodd-Frank has no such limits or rules on short selling) is in the area of taxation, according to one banker familiar with the law. Among the EC proposals is one to put a levy on all spot and derivatives transactions on organized exchanges as well as all OTC transactions. How this might apply to exempt transactions remains to be seen. “Dodd-Frank doesn’t have this focus,” the banker said.