Financial Regulatory Forum

UK opposes mandatory exchange trading of derivatives

February 2, 2010

By Huw Jones

LONDON, Feb 2 (Reuters) – Banks should not be forced to shift privately-negotiated derivatives transactions onto exchanges, Britain’s Financial Services Minister, Paul Myners, said on Tuesday.

“We do not see the need for mandating trading of standardised derivatives on organised trading platforms,” Myners told a committee of parliament’s upper chamber.

The G20 group of countries agreed last year that standardised over-the-counter derivatives should be centrally cleared and, where appropriate, traded on an exchange or other type of electronic platform.

This is seen as cutting risk and increasing transparency in a sector whose opaqueness alarmed regulators during the height of the financial crisis.

U.S. insurer AIG, which nearly collapsed, and Lehman Brothers bank, which went bust in 2008, were both closely linked to the derivatives sector.

The European Union and United States are putting the G20 pledges into law but the latter is pushing hard for exchange trading of OTC contracts, which has pleased some exchanges but alarmed dealers and customers.

Myners said it was important to have a coordinated global approach to derivatives to avoid banks playing one jurisdiction against another.

Several central counterparties are emerging or set to emerge to clear the vast $450 trillion over-the-counter derivatives market, such as ICE <ICE.N> in Europe and the United States.

New EU rules would enable new central counterparties authorised in one member state to operate across the 27-nation bloc, ensure high governance standards and rights of access to all users, Myners said.

Britain sought to fend off any fresh attempts to centralise authorisation of central counterparties in the EU where financial supervision is being overhauled.

“Responsibility for authorisation and supervision of central counterparties should remain at the national level. Central counterparties will be of increasing systemic importance,” Myners said.

Big companies like airlines say hedging some risks such as fuel prices can only be done through bespoke OTC contracts that cannot be centrally cleared let alone exchange traded.

The EU’s executive European Commission has signalled that it will accommodate this by slapping capital charges on OTC trades that are not centrally cleared.

Myners said it was essential not to make it difficult for companies to hedge risks through privately-negotiated derivatives contracts due to penal capital charges.

The European Commission is due to publish a draft law on derivatives clearing by July which will need approval from member states and the European Parliament to take effect.

(Reporting by Huw Jones, editing by Ron Askew)

((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com))

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