European regulations affecting derivatives trading will need to be carefully designed to avoid drying up liquidity in the market, regional lawmakers stated on Wednesday, February 8.

Various regulatory reforms are being created at present, which will govern both the trading and clearing of derivatives.

The Financial Services Authority and other regulatory bodies have established a group to investigate whether requiring both parties involved in the trade of OTC derivatives to post margin before executing the transaction would reduce liquidity too much, Barry King, senior associate for OTC derivatives policy at the FSA, told Reuters.

Market participants are concerned that using these liquid assets for margin requirements could hamper economic growth at a time when the global recovery is fragile, the media outlet reports.

Financial regulators have been exploring how much the collateral posted in trades requiring margin should be segregated, according to the media outlet.

King said that pension funds want to create segregated margin accounts for clearing purposes, the media outlet reports.

The $700 trillion OTC derivatives market has drawn significant industry attention as requiring regulations in order to reduce counterparty risk.