15 banks pledge to clear derivatives

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UBS and Credit Suisse, along with other European and US banks, committed Tuesday to greater openness in trading derivatives.

Washington -- Fifteen major banks on Tuesday pledged to provide greater openness in global trading of derivatives, the complex financial instruments believed to be a key element of the current global financial crisis.

In a joint letter to US and other authorities, the international group of banks that dominate the over-the-counter (OTC) derivatives market set targets to reduce risk in the financial system and committed to greater use of central banks coordinating transactions.

"We are writing to inform you of our commitment to increase the usage of central counterparties for clearing, which we believe will significantly reduce the systemic risk profile of the OTC derivatives market," the banks wrote.

The letter, published online by the Federal Reserve of New York, also was addressed to authorities in Britain, France, Germany, Japan and Switzerland, and a copy was sent to the European Central Bank and European and US authorities.

The letter was signed by US banks Bank of America-Merrill Lynch, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wachovia and the New York-based derivatives industry group, the International Swaps and Derivatives Association, Inc.

The foreign banks included Germany’s Deutsche Bank and Commerzbank, Britain's Barclays Capital, HSBC and Royal Bank of Scotland, France's BNP Paribas and Societe Generale, and Swiss banks UBS and Credit Suisse.

The banks said they would increase their target levels, "which are the first set for central clearing, as we improve our clearing capabilities."

The banks' pledge only deals with products traded among themselves.

A proposed bill in the US Congress calls for all OTC "standardised" derivatives-related products to be submitted to clearinghouses.

But in the extremely hard to understand derivatives market, "standardised" products are defined according to how they are treated by a clearinghouse.

The US Treasury presented in May proposed reforms for derivatives, but was unable to estimate the proportion of "standardised" contracts.

The reforms aim to prevent the chaos that occurred in 2008 after the collapse of big financial firms involved in derivatives, Lehman Brothers and insurer AIG.

AFP / Expatica

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