LONDON, May 6 (Reuters) - The European Union is set to approve new rules to shine a light on the $600 trillion derivatives market which lay at the heart of the global financial crisis.
WHEN WILL IT TAKE EFFECT?
Draft rules to mandate clearing and reporting of trades need approval from the European Parliament and EU states to become law.
Parliament's economic affairs committee will vote on its version on May 24 before negotiating with member states on a final text due to become law in 2012 to meet a global deadline.
WHAT ARE THE BIGGEST POLITICAL HURDLES?
Scope: The original draft referred to contracts traded off an exchange, known as over-the-counter (OTC), which have a notional value of roughly $600 trillion globally.
Some countries like Britain want to extend the law to all derivatives, including those traded on exchanges, to ensure competition in clearing and avoid potential loopholes.
Many in parliament oppose a broader scope and attempts by Britain to extend the law have met resistance.
Supervision: There is disagreement over how much power a new EU watchdog, the European Securities and Markets Authority, should be given at the expense of national supervisors.
WILL ALL DERIVATIVES HAVE TO BE CLEARED?
Mandatory clearing for all derivatives is not anticipated.
The United States has already said foreign exchange contracts should be exempt from its onerous new derivatives rules and it would be difficult for the EU to go it alone.
EU states have backed an exemption for pension funds from the law initially, for about three years.
Non-financial companies like airlines who use derivatives to hedge against raw material price risks will also likely benefit from clearing exemptions to some extent.
Details of how the exemptions would work in practice have yet to be agreed.
WHAT IS THE FUSS ABOUT CENTRAL BANK FUNDS?
There has been a debate over whether a clearing house must have access to central bank funds for currencies it handles in case it needs a "lender of last resort".
If included in the final text, it could force British-based clearers like LCH.Clearnet to relocate or open a subsidiary in the euro zone to continue clearing euro-denominated contracts.
A deal is emerging among EU states to allow clearers to rely on commercial bank funding if they do not have access to the local central bank.
WHAT ABOUT CONTRACTS TRADED INSIDE A COMPANY?
Branches across the EU of the same bank transact derivatives between each other, known as intra-group trading.
If cross-border intra-group transactions were not exempted from mandatory clearing the EU could be handing a big advantage to the United States, industry officials have said.
WHAT IS INTEROPERABILITY?
The draft law sets out a legal framework allowing clearers for share trades to link up so users can save money by trading on many exchanges but only use one clearer.
This is likely to be included in the final text with a review after three years of whether interoperability can be extended to clearing houses for derivatives trades. Exchanges say extending the scope of the new rules to all derivatives introduces interoperability through the back door.
WHAT ELSE IS HAPPENING?
The United States has already approved its Dodd-Frank reform to require clearing, exchange-trading and reporting of derivatives contracts as much as possible but also faces tricky issues over implementing details.
The EU law looks at clearing and reporting of trades and a separate reform on trading of derivatives is due in the summer.
Banks are looking to see if any transatlantic differences emerge which could be used to escape the heaviest new rules.
(Reporting by Huw Jones; Editing by Dan Lalor)