The composition of the European parliament may be different following recent elections, but the list of challenges facing EU policymakers – European competitiveness, economic resilience, energy security and sustainability – remains the same. Tackling those challenges can’t be achieved without having strong, liquid capital markets that support financing, investment and risk management – which means a well-functioning derivatives market is an important part of the puzzle.

Derivatives play a critical role in the efficient performance of markets and mobilization of capital by enabling corporates, pension funds, insurance companies, asset managers, banks, government agencies and others to manage risk, reduce funding costs, enhance investment returns and achieve price discovery. This encourages liquidity and competition and helps to alleviate uncertainty, giving firms the confidence to lend, borrow and invest – which, in turn, contributes to economic growth. As such, we recently published a paper that sets out a series of policy measures the European Commission (EC) could take to further strengthen the EU derivatives market and support the bloc’s strategic priorities.

For example, there are several derivatives-related initiatives the EC could adopt to improve the vibrancy of EU financial markets, which would help support the competitiveness of the economy. These include encouraging innovations in risk management by ensuring the treatment of financial markets and derivatives activity is proportionate to the underlying risks, improving the attractiveness of EU derivatives market infrastructure and removing barriers to entry, calibrating transparency and reporting rules to establish the EU as a global trading hub, and aligning regulatory requirements to ensure the EU is competitive on an international basis.

Specifically, the EC should allow EU entities to access global liquidity pools without barriers that could hamper effective risk management. That could be achieved by granting non-time-limited equivalence for UK central counterparties (CCPs) well in advance of the June 30, 2025 expiry of the current equivalence decision, and by allowing subsidiaries of EU firms to access non-EU CCPs that have not obtained recognition under the European Market Infrastructure Regulation (EMIR) without being subject to punitive capital requirements.

Regulators should also review the EU’s transparency framework to ensure useful information is published and to reduce barriers to entry for global market participants – for instance, by adopting international standards like unique product identifiers and by facilitating machine-readable and executable reporting. In the latter case, ISDA has adopted its Digital Regulatory Reporting initiative for the revised reporting rules under EMIR, enabling firms to digitally report data accurately, cost-effectively and efficiently.

When it comes to reinforcing the resilience of the EU, ISDA recommends several key policy measures to strengthen European financial markets to ensure they continue to serve the real economy, even during stressed conditions. This includes automating collateral management processes to improve efficiency and cut operational and liquidity risks. To help enable this, ISDA has developed several use cases for standardizing and automating collateral processes using the Common Domain Model, a free-to-use data standard for financial products, trades and lifecycle events. ISDA also recommends reducing barriers to accepting money market funds as eligible collateral for cleared and non-cleared derivatives – something that would provide investors with more options when faced with elevated margin calls during periods of volatility.

The transition to a climate-neutral and sustainable economy remains a matter of urgency in the EU and elsewhere. This shift is estimated to require approximately €400 billion per year in additional green investment in the EU alone. Deep, liquid financial markets will be critical to channel the necessary capital to green technologies and infrastructure, and derivatives will play an important role in enabling firms to optimize funding costs and manage risks. In the paper, ISDA sets out several recommendations aimed at improving transparency and disclosure requirements and developing a robust, credible system for carbon credits that is as internationally connected as possible – for example, by linking the EU and UK emissions trading systems.

Ultimately, derivatives help drive vibrant, competitive markets and enable firms to manage risk and invest. We think our recommendations will create a safer, more efficient EU derivatives market, which will help support the key EU objectives of boosting competitiveness and economic security, while helping to achieve a successful green transition.