Global regulators split over derivatives trading

By Huw Jones

LONDON | Fri Feb 18, 2011 2:01am EST

LONDON (Reuters) – Global regulators are split over which electronic platforms can trade derivatives to improve transparency, raising the prospect of banks shifting business in the $600 trillion sector to less restrictive countries.

The International Organization of Securities Commissions (IOSCO) was tasked by world leaders to flesh out a pledge that standardized derivatives contracts should be centrally cleared and, where appropriate, traded on a platform by the end of 2012.

Derivatives in the over-the-counter (OTC) or off-exchange sector are largely transacted bilaterally among banks — making it harder for supervisors to check who is exposed to which contracts when things go wrong, such as with the collapse of Lehman Brothers in 2008.

Hans Hoogervorst, chairman of IOSCO’s technical committee, said in a report on Friday that platform trading of derivatives would boost competition, transparency and supervision — as long as the conditions were not too narrow so that a wider range of contracts can be captured.

“IOSCO believes that it is appropriate to trade standardized derivatives contracts with a suitable degree of liquidity on organized platforms, provided that a flexible approach encompassing a range of entities that would qualify as such platforms is taken by regulators,” Hoogervorst said.

Derivatives are under the spotlight again as the planned merger of Deutsche Boerse and NYSE Euronext creates a massive derivatives hub to compete with the CME.

Such exchanges hope to capture a big slice of derivatives under regulatory pressure to migrate onto platforms and some regulators are keen for competition from other providers.

The report has been sent to the Financial Stability Board which has been tasked by the world’s 20 leading economies (G20) to coordinate tougher regulation following the financial crisis.

The FSB will update the G20’s finance ministers on progress in regulation in Paris on Friday and Saturday.

Continue reading here.

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