POLITICIANS yesterday raised fears that European Union plans to regulate trading tools used by hedge funds and banks could create new institutions that are “too big to fail”.
The European Commission proposes to tighten rules on over-the-counter derivatives by forcing more trades to be conducted through central clearing houses. Clearing houses provide stability because they take on most of the credit risk in a transaction. But the House of Lords EU Committee warned the European watchdog would not be able to claim authority over clearing houses because it does not have the financial clout for a bailout should one go under.
Baroness Cohen of Pimlico said: “We have some problems with the Commission’s idea that the EU should be supervising in this field – we just don’t think it’s realistic.”
She added: “Under current plans, the European Sales and Marketing Association would be in charge of central counterparties. But can we have a European supervisory body that can’t bail people out when it goes wrong? The British line is ‘no’.”
Edmund Parker, a specialist derivatives lawyer at Mayer Brown, went further. He told City A.M.: “In central clearing houses we could create another monster in terms of being too big to fail.”