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Banks seek delay in derivatives rules

Thursday, August 21 14:10:56

The international banking industry has asked regulators for more time to implement derivatives rules that could add USD800 billion to the global financial industry's cost of doing business, people familiar with the matter said.

The International Swaps and Derivatives Association (ISDA), which represents the over-the-counter derivatives market, has written to the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO), the global regulatory banking and securities bodies, requesting a delay to rules that aim to make trading derivatives safer, the people added.

"Amongst other points, the main submission is that the market will not be able to meet an implementation date of December 2015 and therefore suggests that the implementation date be delayed," one banker who had knowledge of the letter told Reuters.

Any delay would be a further blow for the G20 post-crisis reform agenda, which is well-behind its original schedule.

The letter is the latest in a series of industry efforts to delay the implementation of the G20 reform agenda amid fears the new rules will dramatically overhaul bank business models.

ISDA is seeking a two-year delay to international rules that will require banks to secure OTC trades with collateral, such as bonds or equities.

Bankers are asking for more time to make the significant operational and legal changes necessary, and to help the financial system adjust more smoothly to the potential drain on assets the new rules are expected to create, individuals familiar with the matter said.

Regulators internationally are overhauling the global OTC derivatives market after it emerged banks such as Lehman Brothers were able to amass piles of risk in these privately-negotiated high-value trades.

They aim to make trading OTC derivatives safer by pushing as many as possible through clearing houses, which sit in between a trade to guarantee payment in the event of counterparty default.

However, around $127 trillion worth of the global $600 trillion OTC derivatives market are too complex to be cleared, estimates ISDA.

New guidelines outlined by BCBS-IOSCO in September 2013 aim to make trading these non-clearable OTC derivatives safer by requiring banks to take collateral from a counterparty as protection in the event that firm defaults on the trade. The process is known as "bilateral margining".

Posting such a margin dramatically increases the cost of trading an OTC derivative by tying-up liquid assets that could be used elsewhere to raise funds or generate interest income.

Research published by ISDA in 2012 suggested that, in the best-case scenario, the introduction of bilateral margining globally would suck up $800 billion in liquid assets.

Bankers say the rules will require them to create new legal agreements with clients and recalibrate risk models. In some countries, it will require changes to the legislative framework to account for new asset custody arrangements, they said.

"There are quite significant economic and technical challenges," said Michael Steinbeck Reeves of consultancy Catalyst.

Bankers also fear regulators globally are falling out of sync on the implementation of the rules, which could lead to regulatory arbitrage.

The ISDA letter also requests that regulators phase-in the introduction of so-called variation margin, a type of bilateral margin that is posted daily to cover paper gains and losses on derivatives positions.

ISDA declined to comment on the content of the letter. IOSCO declined to comment. The BCBS did not immediately respond to requests for comment. (Reuters)

For more visit: www.businessworld.ie