Banks shed light on derivatives for regulators

November 6, 2009

   By Jane Baird
   LONDON, Nov 5 (Reuters) – Derivatives market participants are creating entities to provide regulators with information necessary to spot system-threatening risk exposures in the $600 trillion market.
   Amid intense debate on legislation and regulation of the derivatives in the wake of the financial crisis, the industry has been taking steps to make over-the-counter (OTC) markets more transparent and easier to regulate.
   A committee of bankers, working through the International Swaps and Derivatives Association (ISDA), has appointed TriOptima to collect information on all trades in the $418 trillion interest rate derivatives market by the end of 2009.
   For the roughly $9 trillion equity derivatives market, another committee has picked the Depository Trust & Clearing Corp (DTCC) and Markit to create a complete repository by end-July.
   At the same time, CLS Bank has offered to provide a full global repository for the $49 trillion foreign exchange derivatives market by mid-2010.
   Meanwhile, DTCC has expanded its existing credit derivatives repository to include all contracts by end-July, adding $5.7 trillion in one-of-a-kind credit default swaps to more than $26 trillion in CDS already accounted for. [ID:nL5516872]
   “As an industry, we want to be able to provide this information to regulators so that they are able to analyse it and get a fair and accurate picture of the OTC derivatives market,” said Gina Ghent, managing director of Equity Derivatives Product Management at Markit/SERV, a trade processing firm jointly owned by DTCC and Markit.
   It is also important that regulators have a means of being plugged into what is happening in the market through regular communication, she said. “These markets are not easy to understand with just a piece of paper.”
   Derivatives have been in the spotlight since U.S. insurer AIG’s <AIG.N> huge losses from tailor-made CDS contracts came as a surprise to regulators and led to an $85 billion government bailout. Those AIG contracts are now included in the $5.7 trillion recently added to the DTCC repository.
   To head off the possibility of other failures lurking behind the scenes that could threaten the financial system, regulators have demanded greater transparency on OTC derivatives so concentrations of risk can be identified earlier.
   Dealers promised to create the repositories to help solve the problem among a number of other commitments to regulators in a series of letters to the New York Federal Reserve.
   David Wainer, derivatives and structured finance partner at law firm Allen & Overy, expects the increasing transparency of the derivatives market to enable the U.S. Securities and Exchange Commission to better assert its anti-fraud jurisdiction and potentially bring more cases against dealers and investors.
   “The SEC is going to use the new-found transparency to try and identify where the market is being abused, where players are doing things they should not be doing,” he said.
   “Once regulators get access to all the information on derivatives, the emphasis will be on them,” Wainer said. “They are under pressure not to drop the ball.”
   In Europe, creation of separate regional repositories to rival the DTCC and others has been under discussion.
   The Madrid stock exchange <BME.MC> this week was the first in Europe to announce plans to open a derivatives warehouse by mid-2010. [ID:nL3254236]
   “It makes sense to have the information in a single location,” Ghent said. “If separate repositories are created, then regulators will need a central repository to consolidate that information.”
   Damian Carolan, regulatory partner at law firm Allen & Overy, said as long as European regulators were comfortable they will get sufficient access to repository data, they would probably not insist on a separate European entity.
   “It is accepted that repositories require comprehensiveness of data and that fragmentation could be a disaster,” he said.
   Meanwhile, proposed U.S. derivatives legislation so far does not even attempt to deal head-on with many of the root issues of the crisis including the highly leveraged bespoke CDS that hurt AIG, collateralised debt obligations or banks’ off-balance-sheet vehicles, Allen & Overy’s Wainer said.
   “Instead, measures such as central counterparties and exchange trading deal with common, flow-traded CDS contracts that nobody was particularly worried about anyway,” he said.
   For a FACTBOX-Companies providing key data on derivatives, click on [ID:nL5538458]
    ((, Reuters Messaging:, +442075422471))
Friday, 06 November 2009 09:45:49RTRS [nL5525440 ] {C}ENDS

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