London - New rules on how much collateral is needed to back derivatives trades are unlikely to be finalised before September, leaving markets in limbo as global regulators seek to minimise potential harm to economic recovery.
World leaders had requested that the rules be in place by the end of 2012. However, agreement has proved difficult because of the huge demand for collateral at a time when banks are already being forced to beef up their capital reserves.
The delay has left markets second-guessing the changes to how the $640 trillion derivatives market will function and plug gaps highlighted by the financial crisis.
David Wright, secretary general of the International Organisation of Securities Commissions, comprising all the world's main market regulators, said on Wednesday that the final shape of the rules on posting collateral, also known as margining, needed further consideration.
“We need to do more economic thinking on the balance of the overall package,” he told a conference held by the Association for Financial Markets in Europe, a banking trade body.
The regulators are looking at the level of high-quality assets, such as government bonds, that a bank or company holding uncleared derivatives will have to post in case of default.
Mark Carney, who heads the global Financial Stability Board that is overseeing the drafting of the rules, expects them to be completed by September, Wright added.
Regulators are finding it difficult to determine how much collateral should be posted on uncleared derivatives trades. Cleared trades, which are contracts squared up in a process backed by a default fund in case one side of the trade goes bust, are considered safer than uncleared trades.
World leaders have said that there should be an incentive to clear trades, suggesting that they want higher collateral requirements on uncleared transactions.
Banks, meanwhile, have warned that a trillion dollars or more of extra collateral will be needed for posting against trades if the new rules are too severe.
The consultation on “near-final rules” will be launched within days, Wright said, and a phase-in period after September is almost inevitable.
The extra time being taken to get the new derivatives rules right is the latest sign of how regulators are trying to find ways to avoid forcing banks to tie up too much capital, thereby making it harder to lend to companies to generate growth struggling economies.
In January, banking regulators eased and delayed full implementation of a separate rule that will require banks to build cash buffers to withstand sudden market shocks unaided.
Robert Stheeman, chief executive of the UK Debt Management Office, said that markets were innovative enough to find ways around any collateral shortage.
Patricia Mosser, senior vice president at the Federal Reserve Bank of New York, also cast doubt on the “eye popping” estimates for possible collateral shortages, saying that markets are already moving to help to bridge any gap.
“Innovation in collateral management is almost like a growth industry,” Mosser told the conference. - Reuters