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European Union member states reached a deal Tuesday to tighten regulation of over-the-counter derivatives contracts, despite initial protests from the U.K.

The proposal received support from a majority of the bloc's 27 member states, but had faced resistance from the U.K., which feared ambitious regulation could shift parts of its dominant financial sector elsewhere.

However, the U.K. won a potentially significant concession with the Commission pledging to include regulation of exchange-traded derivatives in future legislation.

The legislation aims to standardize all derivatives products not traded on a regulated exchange, a pledge made by all Group of 20 leading and developing in the aftermath of the financial crisis to rein in the $600 trillion industry.

The agreement still needs to be approved by the European Parliament--something that could take months of negotiations.

The G-20 committed to introduce laws by the end of 2012.

Under the EU proposal, financial and non-financial firms with large over-the-counter derivatives positions would have to report them to trade repositories, or data centers, and clear the derivatives through central counterparties.

The U.K. has charged the focus on over-the-counter instruments should expand to all derivatives, so that the EU's other large financial center, Germany, faces the same consequences.

While the U.K.'s derivatives businesses trade mostly off an exchange, Germany has one of the dominant electronic derivatives platforms in the world.

Moreover, Frankfurt-based Deutsche Boerse AG (DB1.XE) is set to become the world's largest platform for trading derivatives if a planned merger with NYSE Euronext (NYX) is approved.

-By Riva Froymovich, Dow Jones Newswires; riva.froymovich@dowjones.com

(Laurence Norman contributed to this article.)

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