LONDON, Oct 20 (Reuters) - The European Commission mapped out its plans on Tuesday to reshape and regulate the $450 trillion market for privately-negotiated derivatives contracts used by companies to limit their exposure to price swings.
The plans dovetail with aims agreed by the Group of 20 leading countries in September as part of wider efforts to learn from the credit crunch and the role of derivatives in the collapse of Lehman Brothers and near demise of insurer AIG.
BIG PICTURE
* If all the plans are implemented, industry officials say they will fundamentally reshape the lightly-regulated sector, centralising trading, clearing and transaction reporting.
* When the next crisis hits, supervisors will have speedy data on which firms are exposed to which contracts and help avert the need for government bailouts of banks.
* It will shape competition, determine the location of market infrastructure and the nature of products available.
* Exchanges and clearing houses will see new revenue streams. Banks that write and trade large volumes of contracts will be hit by far higher charges that will be passed on to users.
* Tailor-made contracts will become much more expensive and some people may decide to stop using them and instead bear the risk of price swings in currencies, fuel and other supplies.
* Industry sees many of the measures as politically motivated with no real evidence that derivatives caused the credit crunch. Banks hope that compromises will be found once lawmakers tackle the difficulties of translating complex policy aims into workable rules.
CLEARING AND REPORTING
* The basic thrust of the plans is not new and follow G20 lines that as many contracts as possible are standardised so they can be centrally cleared and traded on an exchange or electronic platform.
* Europe is to get its first law regulating central counterparties: banks began clearing European credit default swap trades voluntarily through Eurex Clearing and ICE from July but the new law would make it mandatory to clear all types of standardised derivatives contracts, not just CDS. This is already the case concerning some other types, like interest rate swaps.
* Banks accept the need for greater use of central clearing but say some derivatives contracts are bespoke to meet the needs of individual airlines or manufacturers which want to hedge price risks.
* Trades that are centrally cleared need little if any capital charges as the clearer is backed by a default fund to which the banks contribute.
* The Commission says banks which trade contracts that are not centrally cleared will face far higher capital charges and tougher collateral requirements, a double whammy the industry says is overkill.
* There will be a new law to mandate reporting of positions and of all non-centrally cleared trades in a repository or warehouse.
* There is only one repository at the moment, run by the DTCC in the United States, to hold "golden copies" of transactions. It's unnclear to what extent the Commission will insist there must be an EU-based repository, a step banks say would fragment market data and bump up costs.
* Separately, global regulators and the derivatives industry are due to unveil a roadmap to reach tougher collateral requirements on contracts that are not centrally cleared, a step banks say should address the Commission's concerns.
POSITION LIMITS
* A new departure for Europe: regulators will be given powers to slap position limits on contracts, which could force large investors in Europe to rebalance their portfolios.
* Policymakers accuse traders in energy derivatives of pushing up oil prices and want position limits to curb what they see as speculation. Industry officials say position limits are politically motivated and the supposed need for them is not backed up by evidence.
* New regulations on how many futures contracts hedge funds, investment banks and other speculators can control could be in place in the United States this autumn and the EU will be under pressure to follow suit quickly to avoid accusations it is trying to lure business from across the Atlantic.
EXCHANGE TRADING
* The Commission follows the G20 line on mandatory exchange or electronic platform trading of contracts where appropriate, a rider welcomed by banks as implying caution.
* Banks say forcing chunks of trading onto exchanges or platforms does not mean those contracts would attract the same level of liquidity as they did off-exchange.
* Some exchange officials say privately that forcing too much volume onto exchanges could harm overall liquidity in the market though other bourses savour the regulatory wind in their sails and prospect of new revenue streams.
* Banks may back new trading platforms so that bourses don't get all the new business, using increased competition in European share trading as an example to follow.
TIMING
* If the Commission proposes new laws next year, industry officials expect them to take effect sometime around 2013.
* All new laws will need approval from the European Parliament and EU states, a process prone to protracted deal-making. The central counterparty law will be the first of its kind and deal with difficult cross-border financial issues.
* The EU will also have to take its cue on capital requirements from the global Basel Committee on Banking Supervision which is not due to finalise its revised rules until the end of 2010.
* Brussels will also keep a close eye on the United States in case parts of the industry negotiate opt-outs of potentially more lenient rules. (Reporting by Huw Jones, editing by Stephen Nisbet)