Regulators ease derivatives rule to avoid harming economy

Mon Sep 2, 2013 5:39am EDT
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By Huw Jones

LONDON (Reuters) - Global regulators have eased the impact of new rules designed to make the $630 trillion derivatives market safer as they seek to avoid too-tight controls on the sector that some banks argue could harm economic recovery.

The Basel Committee of regulators and central bankers published their final rule for requiring banks and brokerages to post an initial margin on trades in derivatives known as swaps, if those trades don't pass through a "clearing house" which in itself generates a backup if one party to the trade goes bust.

The reform, which now envisages a threshold on the value of a trade below which no collateral is required, is part of a wider shake up of derivatives which is underway among the top 20 economies (G20), including the mandatory clearing of trades where possible, and for all transactions to be recorded.

Regulators want to apply lessons from the 2007-09 financial crisis in which the opaqueness of derivatives such as credit default swaps - used to insure against falls in bond prices - played a central part in creating market uncertainty.

Use of a clearing house means trades are backed by a default fund as insurance and the aim of an initial margin - where cash or top quality government bonds are used to back a trade - is to provide a similar safety cushion.

The final rule was published on Monday ahead of a summit of G20 leaders in Russia on Thursday and Friday who will update themselves on progress in regulatory reforms.

The new rule will require traders in derivatives to in many cases post an initial margin for the first time. They already post a so-called variation margin that takes into account daily changes in the value of the swaps contract.

Yet some banks have warned that the new rule, coupled with other reforms forcing traders and banks to use more collateral, will create a shortage of top quality collateral.   Continued...