Europe to miss G20 deadline for mandatory derivatives clearing, according to press reports

The head of the European Commission's Financial Markets Infrastructure unit, Patrick Pearson, told a conference in London earlier this week that Europe would miss the G20 group of major world economies' 1 January 2013 deadline, according to a report in the Financial Times. While legislation would likely be in place by the end of the year, "time is really short", he said.

"The G20 may need to revise their timetable for reform, given the lack of progress globally," he added, according to the report. "[I]t is having discussions resetting its deadlines as key deadlines are not in place."

In September 2009 the G20 group of 20 major global economies, which includes 19 countries plus the European Union, set out its commitments to improving transparency in the derivatives trading markets and protect against market abuse. In the EU, these commitments will be implemented through the draft European Market Infrastructure Regulation (EMIR), the text of which was approved by the European Parliament last month.

Under EMIR, all OTC derivative contracts will have to be cleared through central counterparties (CCPs). CCPs sit in the middle of a trade between two parties and assume the counterparty risk, ensuring financial performance of the trade if one party does not meet its commitments.

In addition all derivative contracts, including OTC derivatives, will have to be reported to central 'trade repositories'.

Increased regulation of the derivatives market was proposed in the wake of the financial crisis and the collapse of major financial services firm Lehmann Brothers in 2008. The firm was a leading player in the OTC derivatives market.

A derivative is a type of financial contract linked to the underlying value of the asset to which it refers, such as the movement of interest rates or currency value, or the possible bankruptcy of a debtor. OTC derivatives are those not traded on a regulated stock exchange, but are instead privately negotiated between two parties. EMIR will apply to all derivatives trades which are not "executed on a regulated market" – over 95% of the derivatives market, according to EU figures.

The European Securities and Markets Authority (ESMA), which will regulate the new trade repositories with which derivative contracts must be registered, is currently drafting technical standards which must then be drafted into law. EMSA is due to present its draft to the European Commission by 30 September, according to Pearson.