EU INTERNAL markets commissioner Michel Barnier will follow a deal to set up new pan-European financial regulators with new proposals to tighten the regulation of derivative markets, short-selling and credit default swaps.

The deal on the structure of the three new agencies and new systemic risk body was struck on Thursday night between EU diplomats, the European Commission and the European Parliament.

It clears the way for MEPs to vote on enabling legislation at the end of this month, in turn clearing the way for new European regulators to oversee banks, insurers and market traders to start their work by the start of 2011.

“We have reached a crucial milestone,” Mr Barnier said of the effort to create a regulatory system capable of preventing any repeat of the build-up of pressures that led to the financial crisis.

In essence, the new system is designed as a bulwark against any weakness in national systems with an additional regulatory layer of unified pan-European rules.

“We have reached a political consensus on the creation of a European financial supervisory framework,” Mr Barnier said.

On Wednesday week he will publish proposals to oversee three forms of unregulated or lightly regulated trading whose popularity has been widely linked to the increased level of overall risk in financial system.

The commission wants to set common standards on credit default swaps, which insure against the risk of default, and on short selling, the practice of selling an interest in a security that the seller does not own.

He will also publish plans to make the trade in derivatives “more safe, sound and efficient”.

The deal ends lengthy negotiations between national government about the remit of the organisations and arguments with MEPs over the scope of their work.

The new agencies, first proposed a year ago by Mr Barnier’s predecessor Charlie McCreevy, will be empowered to oversee compliance with EU law in the financial sector. They will be able to ban financial products deemed too risky, but only temporarily.

The new agencies will also monitor threats to financial stability and be empowered in the case of financial emergencies to issue legally binding decisions to national regulators on the regulation of individual institutions.

This had been resisted by Britain, where there were fears the new system would undermine the City of London’s lustre as a financial centre.