DealBook: Britain and European Union Agree on Regulating Derivatives Trades

Yves Logghe/Associated PressThe British chancellor of the Exchequer, George Osborne, departs after meeting with European Union finance ministers in Luxembourg on Tuesday.

7:29 p.m. | Updated

Britain struck a deal Tuesday with its European Union allies on how to regulate trading in over-the-counter derivatives, a compromise that the government said would improve regulation and protect financial markets across Europe.

At a meeting of finance ministers in Luxembourg, the British chancellor of the Exchequer, George Osborne, won a concession that would in most cases prevent the national regulator from being overruled on the authorization of trading by companies in over-the-counter derivatives in Britain.

An over-the-counter derivative is a financial instrument derived from another asset, like a stock or a bond, that is traded privately between parties rather than on an exchange. British officials say that London’s financial district handles around 75 percent of the European market for such derivatives.

In the United States, regulators, armed with the Dodd-Frank Act, have already moved to overhaul the over-the-counter market. American banks oppose many of the changes, saying the restrictions will force business overseas while foreign regulators lag behind with their own set of derivatives rules.

Mr. Osborne also secured a pledge that the European Commission would extend regulation to exchange-traded derivatives, which Germany dominates. Britain argued that the extended regulation was needed to establish a level playing field in Europe.

“We came here in a minority, somewhat outnumbered,” Mr. Osborne said. “Through some hard negotiation we very much improved the directive. We are going to have what we all wanted, which is more effective regulation of the derivative market.”

The European Commission argues that the new rules will provide vital transparency because trades will have to be registered and regulators will have access to that data.

The negotiations occurred amid growing tension between Britain and some European partners over financial services regulation. Britain fears that France and Germany want to ratchet up regulation to put London at a disadvantage as a financial center. Under European single-market rules, Britain could have been outvoted had it not struck an agreement.

The proposed changes, which will now be negotiated with the European Parliament, call for trades in over-the-counter derivatives in the 27 nations of the union to be reported to data centers. Regulators would have access to those data centers, while the newly created European Securities and Markets Authority, based in Paris, would have responsibility for the surveillance.

The European commissioner for financial services, Michel Barnier, welcomed the compromise on Tuesday, saying it would allow negotiations to proceed. In the past, Mr. Barnier has said that the lack of a regulatory framework for over-the-counter derivatives contributed to the financial crisis.

“No financial market can afford to remain a Wild West territory,” he has said.

The British government is also resisting plans, supported by Germany and France, for a financial transaction tax unless it can be agreed upon at a global level.

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