The bloc is overhauling its markets in financial instruments directive (MiFID) to catch up with technological advances, apply lessons from the financial crisis and deal with problems such as price fragmentation raised by the original rules.
"The main aim of the proposal is to ensure that all organised trading is conducted on regulated venues and is fully transparent," the draft said.
More specifically, world leaders agreed in 2009 that derivatives, largely traded bilaterally between banks in an opaque $600 trillion (€426 trillion) sector, should be traded electronically.
This will give supervisors the full picture of who is affected when a counterparty gets into trouble, which they lacked when Lehman Brothers bank collapsed three years ago.
"The proposed revision will shift trading of the suitably developed derivatives to such platforms," a draft of the MiFID reform, now circulating widely in Brussels, said.
"This obligation will be imposed on both financial and non-financial counterparties," the draft added.
All derivatives that must be traded on a platform would also have to be centrally cleared and could not be traded elsewhere.
Manufacturers who use derivatives to "insure" raw materials from adverse moves in foreign exchange or interest rates had pushed to be treated more lightly.
Under the proposals, EU regulators would decide which derivatives must be traded on a platform, taking into account how frequently they change hands.
The MiFID reform is in two parts – the first covering market infrastructure while the second part focuses on transparency issues.
Many of the provisions have been trailed through consultations and will force banks to make costly changes to business practices.
The European Commission is expected to publish the two sets of MiFID reforms in October and may make changes before then. The European Parliament and EU states have the final say and fierce haggling is expected.
The second draft reinforces a push to open up clearing houses, often owned by stock exchanges, to competition, including the clearing of highly-traded indices like Stoxx, controlled by Deutsche Boerse.
"Barriers may arise from central counterparties not providing data streams to potential new clearers or information about benchmarks or indices not being provided to clearers," the draft says.
This will also impact vertical groups like Deutsche Boerse which is set to bulk up on clearing if its NYSE Euronext takeover gets the go-ahead from the EU's competition arm.
Making it illegal to keep barriers to clearing competition in place may make it easier for Brussels to approve the Boerse/NYSE merger without major "remedies" to its clearing and stock index licensing.
Intense MiFID-induced competition has driven down margins in share trading, and exchanges hope to win more revenues from clearing. This week London Stock Exchange said it wants a majority stake in LCH.Clearnet clearing house.
The draft reform also wants to bring down the fees exchanges and trading platforms charge for data on share trades.
The Commission says this would make it easier to create a cost-effective combined feed giving investors a snapshot of share prices across all platforms so they see the best deals.
The original three-and-a-half-year-old MiFID rules spawned fierce competition in share trading which led to fragmentation, making it harder for supervisors to spot abuses quickly.
Exchanges and other trading platforms would have to make all data free within 15 minutes of a trade, with live data sold on what the Commission will define as a "reasonable commercial basis" – effectively a move into price regulation.
Platforms would also have to store order data for at least five years to improve market abuse monitoring by supervisors.
This data would include details of whose algorithms were used, marking a further crackdown on high-frequency or ultra-fast computerised trading.
Transparency requirements now in place for share trading will be extended in a "calibrated" way to bonds, derivatives, structured finance products and emission allowances, the draft added.
If the transparency rules don't work within two years, the Commission could force banks and other investment firms to report to a system appointed by the European Securities and Markets Authority (ESMA).
The second half of the MiFID reform also contains tough consumer protection measures such as allowing ESMA to coordinate permanent bans on products or to temporarily suspend a product itself.
ESMA would also have powers to manage or even set positions limits for commodity derivatives if there is a "threat to the orderly functioning of markets or delivery arrangements for physical commodities, or stability of the financial system of the Union," the draft says.
EurActiv with Reuters