Lagarde Says Europe Needs Derivatives Clearinghouse, Lags U.S.

By Mark Deen

July 2 (Bloomberg) -- French Finance Minister Christine Lagarde pressed Europe Union partners to speed up efforts to contain counterparty risk in derivatives trades, saying the region is falling behind the U.S. in the area.

France wants countries using the euro to have local derivatives clearinghouses that can access liquidity at the European Central Bank, and is seeking the creation of a data base of derivatives trades.

“Europe is falling behind in this area,” Lagarde said today in a speech to executives gathered at the Europlace conference in Paris. “I’m asking the European Commission to propose directives to harmonize the rules on clearinghouses to guarantee their solidity and reliability across Europe.”

The proposals, already under consideration by the EU, are an attempt to cut risk in the $592 trillion over-the-counter derivatives market after the collapse of banks such as Lehman Brothers Holdings Inc. The plan is similar to one released by U.S. President Barack Obama last month that would require standardized over-the-counter derivatives to be guaranteed by clearinghouses.

Banks holding derivatives on their balance sheets should also get an incentive to register them with clearinghouses in the form of lower capital requirements, the French finance ministry said.

Reducing Risk

Some clearinghouses operate as central counterparties for every buy and sell order executed on an exchange, reducing the risk that a trader defaults on his obligation in a deal. Capitalized by its members, a clearinghouse allows regulators to assess market positions and prices. Customers pay fees for clearing, or post-trade processing services, which include verifying that a buyer has the funds to execute a trade.

U.S. Treasury Secretary Timothy Geithner sent proposals last month to congressional leaders laying out his plan to police over-the-counter derivatives trading, the unregulated market where swaps based on interest rates, currencies, commodities and a company’s ability to pay back debt are exchanged.

Lagarde, who meets with her counterparts from the other 26 EU nations next week, also said today she wants them to toughen regulatory proposals by barring hedge funds registered in non- cooperative offshore financial centers from receiving an EU seal of approval.

On accounting standards, she said that rules on marking to market need to be overhauled as soon as possible to prevent them from amplifying economic booms and busts, and that central banks and governments should be part of the bodies that set such rules because they concern financial stability.

Cross-Boarder Risk

The EU also needs to standardize legal protection for savers so that investors from one country aren’t at risk of buying financial products in a neighboring state with looser oversight, she said.

“I asked for these initiatives to be taken quickly,” Lagarde said, speaking to the conference in a prerecorded video speech because she is part of a delegation of French officials who traveled to Iraq today.

Lagarde also reiterated the French government’s forecast for a return to growth in its economy next year with an expansion of 0.5 percent.

“It will be growth well below potential but a return to growth all the same,” she said, according to a text of the speech released by her office.

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net