Regulators recommend more transparency in derivatives market

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A commission of international regulators recommended Wednesday that trade in over-the-counter (OTC) derivatives be made more transparent to curb financial market instability.

"The lack of adequate information on OTC derivatives exposures is widely seen as having exacerbated a number of corporate distress situations in the recent crisis, including the demise of Lehman Brothers and the near-default of AIG and Bear Stearns," they said in a report.

The recommendations were written by representatives of the Bank for International Settlements, the International Organization of Securities Commissions and the European Commission, following a request from Group of 20 leaders in Pittsburgh in September 2009.

"The G20 wanted transparency rules on these types of transactions, which are very opaque and can be valued at thousands of billions of dollars, to be improved," an official familiar with the document told AFP.

He said the recommendations deal with interest rate, equity, credit, foreign exchange derivatives and others types of derivatives.

Foremost among the recommendations is that OTC trades being reported to trade repositories (TR) should be harmonised and improved.

"At a minimum, transaction level data should be reported to trade repositories (TRs)" the document said, with the information accessible to public authorities.

It also recommended that a system be developed to allow authorities to determine the authorship of the transactions, through a system it calls a legal entity identifier (LEI).

"An LEI would contribute to the ability of authorities to fulfill the systemic risk mitigation, transparency, and market abuse protection goals," the report said.

"As a universally available system for uniquely identifying legal entities in multiple data applications, LEIs would constitute a global public good," it adds.

The suggestions are open to comment until September 23 and the final recommendations will be issued at the end of the year.

© 2011 AFP

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