Fragmented Swaps Rules Will Weaken Markets, Rohner Says

Regulation of the global over-the- counter derivatives market will weaken the financial system if it’s not coordinated globally, according to Urs Rohner, vice chairman at Credit Suisse Group AG.

U.S. and European regulators are seeking changes to the market to increase transparency and prevent a repeat of the financial crisis. The industry supports reforms that reduce systemic risk, such as central clearing, as long as they are coordinated, Rohner said at the International Swaps & Derivatives Association’s annual meeting in Prague today.

“A fragmented approach will lead to weaker institutions, and greater risk,” Rohner said. “We urge regulators and governments to embrace a global vision of a centrally cleared and transparent OTC market that is regulated and strong, rather than fragmented, inefficient and weak.”

Cooperation between regulators and the industry is important, Rohner said. The credit-default swaps market is a “model” of successful cooperation in averting potential problems, he said.

A series of changes to the credit derivatives market since the bankruptcy of Lehman Brothers Holdings Inc. and rescue of American International Group Inc. have standardized trading and settlement processes.

Fix Shortcomings

“Our challenge — our duty — is to fix our industry’s shortcomings before others try to fix them for us,” Rohner said. “Greater standardization, better access for regulators to data via trade repositories, increased central clearing, and compression — these are all important ways to reduce risk in the financial markets.”

The European Securities & Markets Association has formed a consultation group of stakeholders in the derivatives market to participate in the regulatory process, Steven Maijoor said in his first public speech as chairman of the organization. ESMA will seek to ensure views of market participants are taken into consideration, he said in his keynote address at ISDA’s meeting.

“Industry commitments, although important, are not sufficient,” he said. “To achieve the key objective of reducing counterparty and systemic risk and increase transparency to both market participants and regulators, global financial reforms are needed.”

The main challenge to ESMA’s regulation of the derivatives market will be balancing “the need to align global regulatory outcomes and the need to respect the specific characteristics of European markets,” he said

“International coordination is essential in a global market. To ensure safe and sound markets, regulatory arbitrage has to be avoided. However, from an international perspective we not only need to avoid regulatory gaps, we also need to avoid overlap by taking into account the regulations and supervisory systems in other jurisdictions.”

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

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