Regulators call for 'aggressive' push in derivatives reforms

11th October 2011, Comments 0 comments

Regulators on Tuesday urged countries to "aggressively push forward" planned reforms of the trillion-dollar derivatives markets that were blamed for helping precipitate the global financial crisis.

With just a year before the end-2012 implementation deadline set by the G20 for the reforms, the Financial Stability Board noted that "few FSB members have the legislation or regulations in place to provide the framework for operationalising the commitments."

The board said it was understandable that smaller economies may be waiting for the two key players in the market -- the European Union and the United States -- to set out their frameworks before developing their own.

"Nevertheless, it is important that all jurisdictions advance development of their legislative and regulatory frameworks as far as they are able even before finalisation of the US and EU regimes, to be in a position to act expeditiously once rules are finalised in these two largest OTC derivatives markets," it said.

Derivatives are privately traded financial instruments linked to one or more other assets, for instance a commodity, a bundle of mortgages or other debts.

Critics deride them as overly complex and speculative rather than substantial, long-term investments.

A US Senate committee estimated in 2010 that the overall global trade in derivatives was worth around $600 trillion.

The OTC (over-the-counter) derivatives reforms are part of a broader thrust by global regulators to tighten up financial services and banking practices following the huge financial damage wrought during the crisis.

In October 2010, global regulators made 21 recommendations to reform derivative trading, including calling on authorities to increase the amount of standardisation in the market, with a central clearing system to ensure orderly settlement of trades.

They also recommended reporting to trade repositories to give authorities a global view of the markets.

Nevertheless, progress has been delayed by the ongoing debt turmoil in the eurozone.

On October 4, the European Union finally sealed a deal on regulating OTC derivative trade in the bloc.

The new regulations require clearing houses that handle more than five percent of the market in a euro-denominated financial product to be based in the eurozone.

Britain's financial centre controls three quarters of the derivatives trade across Europe and half of the trade worldwide.

© 2011 AFP

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