Joan Burton (Dublin West, Labour)
Link to this: Individually | In context

Question 86: To ask the Minister for Finance if credit default swaps and certain related derivative contracts are regarded by the regulatory authorities here as valid financial instruments creating enforceable rights or as void and unenforceable as wagering contracts; the manner in which dealing in such contracts is regulated; and if he will make a statement on the matter. [39000/08]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
Link to this: Individually | In context

The provision in the State of certain investment services, such as professional dealing services or investment advice, in respect of a credit default swap would fall to be regulated by the Financial Regulator under the European Communities (Markets in Financial Instruments) Regulations 2007 (S.I. No. 60 of 2007), which transpose the EU Markets in Financial Instruments Directive (2004/39/EC) into national law. This would be on the basis that what is concerned in the Deputy's question is a 'derivative instrument for the transfer of credit risk' within the meaning of that legislation. In such a case, subject to certain exceptions provided for in the Regulations, an Irish firm providing those services would require to be authorised by the Financial Regulator and its compliance with the Regulations and related capital requirements would be supervised by the Financial Regulator. The position is the same for other derivative instruments covered by those Regulations.

Equivalent requirements apply in other European Member States (pursuant to the above Directive) and are supervised by the corresponding regulatory authorities in those Member States. Where those firms have a branch in Ireland, the Financial Regulator supervises their compliance with rules applicable to that branch.

In terms of any question as to the validity of such contractual obligations, this is a matter for the Courts. Where the contract is governed by Irish law, the relevant Courts would be those of Ireland. Where it is governed by laws other than those of the State, it will be the Courts of the relevant foreign jurisdiction. For example, there is an international practice for many such contracts to be governed by either English or New York law. Generally speaking, there is not a question over the legal validity of derivative contracts such as credit default swaps and they are of common use in the financial markets and wider domestic and international trade. In the specific case of Ireland, the Netting of Financial Contracts Act 1995 bolsters the effectiveness of such contracts by providing that the set-off mechanisms (referred to as 'netting') inherent in such contracts are valid, including on an insolvency of one of the parties.

Joan Burton (Dublin West, Labour)
Link to this: Individually | In context

Question 87: To ask the Minister for Finance his views on the nature and extent of dealing in contracts for difference in Irish publicly quoted companies; if he proposes to take steps to restrict or otherwise reform the regulation of these instruments; and if he will make a statement on the matter. [39001/08]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
Link to this: Individually | In context

The main Irish shares traded which use Contracts For Difference (CFDs) are dual-listed shares and the vast majority of Irish CFD trading is completed on a cross-border basis, with counterparties outside the State. There are no published figures available in relation to the volumes of these transactions.

CFDs represent a way of taking a position on a listed company without actually buying or selling its shares. It is clearly desirable that there should be greater market transparency in relation to such activity. The market should know when a person has a significant holding of CFDs. In fact the Regulations which transposed the EU's Transparency Directive (Directive 2004/109/EC) into Irish law require announcements to be made in relation to financial instruments that provide an option to purchase. However, this is an international issue, given that shares can have multiple listings in different jurisdictions.

The Financial Regulator has been in consultation with the UK's Financial Services Authority with a view to arriving at a similar approach in both jurisdictions so as to avoid the scope for regulatory arbitrage. The FSA is pursuing some initiatives in this area and when these are confirmed, I will, following consultation with the Financial Regulator, consider the need for legislation in this country.