FSB calls for end to trans-Atlantic rift on derivatives rules

October 31, 2012 04:56 PM
Uncertainty said to hamper business

The European Union, U.S. and Japan should resolve a clash over rules for over-the-counter derivatives as it risks hampering efforts by investors and clearinghouses to comply with the measures, global regulators warned.

The Financial Stability Board said that uncertainty over what types of OTC trades will have to pass through clearinghouses is making it harder for businesses to adapt. The lack of clarity and international wrangling may imperil an end- of-the-year deadline for overhauling regulation of OTC markets, the FSB said in an e-mailed report yesterday.

“Progress to date in cross-border discussions” between regulators “has been slow,” the FSB said. The disagreements risk “delaying the full and timely implementation” of the international rules.

The U.S. Commodity Futures Trading Commission is under pressure from regulators in the European Union and Japan to overhaul its planned national rules for OTC derivative trading on concerns that the measures may leave companies outside the U.S. facing overlapping requirements and unnecessary costs if they seek to trade with U.S.-based businesses.

“At a time of highly fragile economic growth, we believe that it is critical to avoid taking steps that risk a withdrawal from global financial markets,” U.K. Chancellor of the Exchequer George Osborne, French Finance Minister Pierre Moscovici, Ikko Nakatsuka, Japan’s financial services minister, and Michel Barnier, the EU’s financial services chief, said in a joint letter to CFTC Chairman Gary Gensler dated Oct. 17.

‘Potential Inconsistencies’

The FSB calls in its report for “discussions to quickly resolve any potential inconsistencies and, where needed, agree on coordinated approaches across jurisdictions.”

Regulators sought new rules for OTC derivatives following the collapse in 2008 of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the largest traders in credit default swaps.

The measures include forcing trades in standard types of OTC derivatives to take place on regulated trading platforms and to pass through clearinghouses. The Group of 20 nations agreed in 2009 that the standards should be fully in place by the end of this year.

Clearinghouses such as LCH.Clearnet Group Ltd. and Deutsche Boerse AG’s Eurex Clearing operate as central counter-parties for every buy and sell order executed by their members, who post collateral, reducing the threat from a trader’s default.

Clearinghouses have warned that “legislative and regulatory uncertainty” is “causing delays in offering products for clearing and developing new services to support mandatory central clearing,” according to the FSB report.

“This uncertainty is compounded by perceived potential for overlapping and inconsistent regulation,” the FSB said.

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