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Capital Markets

Regulation: Barnier warns markets off reg arbitrage

EU tracks US derivatives regulation with a time lag; Barnier sets regulatory sight on commodities markets

The European Union internal market commissioner, Michel Barnier,

"The absence of any regulatory framework for OTC derivatives contributed to the financial crisis and the tremendous consequences"

Michel Barnier, EU

The European Union internal market commissioner, Michel Barnier, last month unveiled his proposals to regulate the $615 trillion over-the-counter derivatives markets. Barnier was typically combative when he announced his plans. "No financial market can afford to remain a Wild West territory. The absence of any regulatory framework for OTC derivatives contributed to the financial crisis and the tremendous consequences," he told reporters on September 15. The proposed regulations fall into line with those that were passed into law in the US in July as part of the Dodd-Frank Act, implementation of which will begin next summer.

The proposals follow agreement by G20 leaders last year to standardize derivatives trading and move it on to exchanges or electronic trading platforms where appropriate, as well as mandating central counterparty clearing for all standardized derivatives, such as interest rate swaps.

With the EU legislation unlikely to be passed into law until early next year, there will be a mismatch in when the new rules take effect, opening up possible regulatory arbitrage.

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