Regulators lay out reform of controversial derivatives trade
Global regulators on Monday made 21 recommendations to reform the trillion-dollar derivatives markets that were blamed for helping to precipitate the global financial crisis.
The Financial Stability Board (FSB) said its report on reforming the market for over-the-counter (OTC) Derivatives was endorsed by finance ministers of the Group of 20 rich and emerging economies at a meeting in South Korea over the weekend.
In a statement, the FSB faulted the "limited transparency" of some derivatives trading and highlighted "the potential for contagion" due to weaknesses in the structure of the OTC derivatives market.
Among the recommendations, the FSB said authorities should seek to increase the amount of standardisation in the market, with a central clearing system to ensure orderly settlement of trades.
"A key message of the report is the need to improve the availability of data on the OTC derivatives market as an input to policymaking to promote financial stability, as well as for monitoring," it added.
The central bankers and regulators from 24 countries on the FSB recommended reporting to "trade repositories" to give authorities a "global view" of OTC derivatives markets.
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 earlier this year that the overall global trade in derivatives was worth around 600 trillion dollars.
The OTC 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.
The FSB said the report was only a first step in implementing the derivatives reforms.
© 2010 AFP