Derivatives pose risks on financial markets that central clearing of contracts would mitigate, the European Commission said on Friday, outlining plans that fell short of more radical U.S. steps.

EU Internal Market Commissioner Charlie McCreevy opened an investigation into the sector last October, a month after the collapse of Lehman Brothers which had been heavily involved in the global $600 trillion over-the-counter (OTC) derivatives market where contracts are traded between two parties.

McCreevy published proposals on Friday arguing that standardization of contracts -- a process already underway -- is a prerequisite for central clearing, as well as the creation of a central data depository to store records of trades.

In sum, when concluding an OTC contract, it is difficult to assess the risk that a counterparty may default, the Commission's policy document said.

In highly interconnected financial markets, such an assessment would in principle require any market participant to have good knowledge about all other market participants. As OTC markets have little public information, such knowledge is incomplete, it added.

The plans will be a relief to dealers as they stop short of more radical steps envisaged by the United States which seek to go beyond centrally clearing over-the-counter trades to shift trading onto exchanges or trading platforms where possible.

(Reporting by Huw Jones, editing by Mark John)

Lehman brothers