Britain urges caution on EU derivatives reform

(LONDON) - British authorities on Wednesday urged caution over a European Commission proposal to reform derivatives trading -- a massive high-risk sector widely blamed for helping to trigger the financial meltdown.

The European Commission announced in October plans to move the trading of over-the-counter derivatives, many of which change hands privately outside of exchanges, into organised trading platforms by the end of 2010.

The British Treasury and the watchdog Financial Services Authority issued a joint report on Wednesday warning that such a move could be costly and reduce the flexibility derivatives users have to hedge specific risk.

"We urge legislators to thoroughly consider this before introducing regulations that could significantly alter the structure of the market," the report said.

"Regulatory objectives of reducing counterparty risk and improving transparency can be achieved by other means," it said.

Derivatives are complex financial instruments. Among the most controversial derivatives are credit default swaps, which are a form of insurance against a default in some types of securities.

EU Internal Markets Commissioner Charlie McCreevy had said in October that the collapse of US investment bank Lehman Brothers in 2008 had highlighted the risks of such derivatives in the absence of a central clearing party.

Lehman Brothers' demise has been blamed for helping to trigger the worst financial market volatility in generations through credit default swaps it traded with other firms.

-- Dow Jones Newswires contributed to this report --