Financial Regulatory Forum

FACTBOX – How does the EU plan to shake up financial services?

By Reuters Staff
April 7, 2010

BRUSSELS, April 7 (Reuters) – The European Union (EU) is embarking on an overhaul of financial services that politicians hope will send bankers back to their roots of no-frills lending to households and business.

Michel Barnier is the EU commissioner in charge of the shake up on regulations ranging from curbs on banker pay to a clampdown on speculators betting on government debt.

Here is a guide to the overhaul:

* One of Barnier’s priorities is writing a rule book for trading derivatives, a financial instrument whose value is linked to an asset such as a government bond or currency.

Pushed to the top of the agenda after politicians blamed speculators for worsening Greece’s borrowing problems, the European Commission will in June propose broad controls on market betting.

As part of a drive to force more transparency in the $600 trillion off-exchange derivatives market, Barnier will demand that traders either record their positions, or buy and sell through a central counterparty or exchange.

In October, the Commission will propose controls for short selling and credit default swaps in government debt — a form of insurance.

Barnier will also examine the role of dark pools, or anonymous trading of shares.

* Another key reform will be rules demanding banks set aside more for unpaid loans or other losses in an economic slump.

In December, the Commission will outline what extra capital requirements it will impose.

* In May, the Commission will analyse how existing pay controls — which postpone bonus payouts and demand closer links between pay and performance — have worked. Barnier may extend these rules to other parts of financial services.

* European Union plans to crack down on hedge funds and private equity hangs in the balance after Britain headed off the rules last month.

Ministers were unable to resolve a dispute between Britain — which wants lighter regulation of an industry important for London’s financial centre — and Germany and France, which want a heavier clampdown.

* The watchdogs Brussels sets up to police the system could be central to the success of the EU reforms. It plans to have three pan-European supervisors to decide whether the new rules are being applied properly.

However, EU parliamentarians want to challenge the initial agreement struck last year. Barnier will attempt to broker a deal.

* Brussels lawmakers want to establish a framework for emergency funds that would be used to pay for the winding down a bank in trouble.

EU Commission President Jose Manuel Barroso has pledged to ask world leaders to impose a special tax on banks to cover their wind-up costs in an emergency.

Barnier will publish the commission’s views on the matter June and October, giving a taste of a law that may come in 2011.

* The Commission will examine whether to apply a minimum guarantee on European bank deposits of 100,000 euros ($133,600) in the event of a crash. In July, Barnier will publish rules to protect policy holders if an insurance company collapses.

The Commission wants to take measures to protect borrowers against reckless lending and will issue mortgage guidelines in October. (Reporting by John O’Donnell; Editing by Sharon Lindores) ($1=.7483 Euro)

((Contact John O’Donnell on +32 2 287 6817 or +32 473 92 48 90; john.odonnell@thomsonreuters.com))

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