News / Economy

EU Rules to Light Up Derivatives Markets Set for Shaky Start

Reuters
— New rules coming into force in Europe this week to shine more light on the $700 trillion derivatives markets will take years to produce a clearer picture of these complex products, which were at the heart of the financial crisis.
 
When Lehman Brothers collapsed in 2008, markets were in the dark over a tangle of derivatives on the U.S. investment bank's books. Financial markets froze because of uncertainty about who was exposed to Lehman's derivatives, such as credit default swaps or interest rate swaps. U.S. insurer AIG also ran up big losses linked to derivatives.
 
In response, politicians and regulators around the world called for action to make risks easier to spot in this opaque part of global financial markets.
 
The new EU rules, coming in to effect on Wednesday, aim to increase transparency by requiring reporting of transactions.
 
But even if derivatives deals are captured in this process - a difficult enough task in itself - the data may be too fragmented to give a clear picture of the market and to show where risks might be building up.
 
In practice, a meaningful snapshot will not emerge for years, when all parties involved are reporting properly and all the data is linked. Until then, risks in the markets may go unnoticed again until it’s too late.
 
“It is a challenge getting all this information into a format that is useful and usable,” said Clive Ansell, head of infrastructure management at the International Swaps and Derivatives Association, the world's main derivatives industry body. “We suspect there will be some gaps and possible inconsistencies on day one.”
 
Starting Wednesday, everyone who trades derivatives in the EU must report their transactions to one of six new bodies known as trade repositories.
 
Each trade report will have up to 80 pieces of data to provide regulators with detailed information to help to stop risky derivatives positions building up.
 
The rules cover private transactions - so-called over-the-counter deals - which make up the bulk of the derivatives business globally, but it also includes derivatives deals done on exchanges, which is where regulators want as many deals as possible to take place in the future to improve transparency.
 
Analysts expect about 5 million trades from exchanges and about 20,000 contracts traded privately among banks or companies to be reported daily across the EU.
 
Chris Borg, a financial lawyer at Reed Smith, said regulators appreciated the magnitude of the task and everyone wanted to comply. “However, there is not sufficient clarity or indeed time, to enable them to do so,” Borg said.
 
The United States introduced mandatory reporting in 2012. One U.S. regulator from the Commodities Futures Trading Commission said late last year the data was still a mess.
 
The United States phased in reporting and requires it from only one party of an off-exchange trade. The EU regime is far broader and going for a “big bang” start, with both sides of on- and off-exchange trades having to report from day one.
 
Join the queue
 
The 14 big banks, which trade about 65 percent of the world's derivatives, are largely ready in Europe.
 
However, it is a different story for companies, which account for about 5-10 percent of the market, which use derivatives to insure against adverse price moves in raw materials, currencies or interest rates.
 
“It's not going to be a smooth start as I would be surprised if the majority of companies will be ready on day one,” said Michelle Price, a policy director at the Association of Corporate Treasurers.
 
Exchanges - such as Deutsche Boerse - wanted more time to prepare but were refused.
 
Everyone needs a so-called legal entity identifier, or LEI, a unique code for regulators to identify who is trading, but a great many participants will not have one by Wednesday.
 
“We expect that queue will still be stretching down the street as 12 February comes and goes,” Reed Smith's Borg said.
 
The Financial Conduct Authority, which regulates the UK derivatives market, the EU's biggest, said reporting will not be perfect on Wednesday but people were busy preparing.
 
“We recognize these challenges and will be proportionate in our response to any instances of non-compliance. Firms should however recognize that non-compliance could lead to enforcement action,” an FCA spokesman said.
 
Even when everyone can actually report, regulators still will not have that snapshot of risks they need to do their job.
 
“There are 22 trade repositories that don't talk to each other,” said David Wright, secretary general of the International Organization of Securities Commissions, a global body that brings together market regulators.
 
Five of the six trade repositories in the EU are backed by exchanges whose main reason for setting them up is to use them to woo customers to trade and clear derivatives.
 
The London Stock Exchange, CME, Warsaw Stock Exchange, Deutsche Boerse with the Madrid Exchange, and ICE see their repositories as simply a way of offering a one-stop service in derivatives.
 
This proliferation has forced the Financial Stability Board, a global regulatory body backed by the 20 leading economies (G20), to launch a public consultation last week on how to link and make sense of all the repository data globally.
 
“Even once reporting requirements are in place in all jurisdictions, no single authority or body will have a truly global view of the OTC derivatives market... unless a global aggregation mechanism is developed,” the FSB report said.
 
The DTCC, a clearing house owned by its users, such as banks, operates a repository in the EU. The DTCC said it will be ready to share information starting Wednesday.
 
“As Europe accounts for the largest share of global derivatives trading, we anticipate seeing a significant increase in the volume of trades reporting once mandatory trade reporting commences,” the DTCC said.
 
Fiona Syer of Deloitte's center for regulatory strategy said a clear and accurate global snapshot for regulators is at least four years away - nearly a decade since Lehman crashed.

You May Like

EU Court Fines Poland for Hosting CIA 'Black Sites'

Ruling is first time a court has acknowledged suspects were held and tortured at the sites, under US program launched following the 9/11 terrorist attacks More

Migrant Issues Close to Home Spur Groups to Take Action

Groups placing water, food in the desert, or aiding detainees after release, have one common goal: no more deaths of migrants crossing illegally into the US More

Video At AIDS Conference, Prevention Pill Stirs Excitement

Truveda shows promise, spurring debate over access and other approaches More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Treatment for Childhood Epilepsy Heats up Medical Marijuana Debatei
X
Shelley Schlender
July 24, 2014 6:43 PM
In the United States, marijuana is classed as an illegal drug by the federal government. But nearly half the states have legalized it, to some degree. Proponents say some strains of marijuana might have exceptional health benefits, for treating pain or inflammation in chronic conditions such as cancer, multiple sclerosis and epilepsy. Shelley Schlender reports on a strain of medical marijuana developed in Colorado that is reputed to reduce seizures in childhood epilepsy
Video

Video Treatment for Childhood Epilepsy Heats up Medical Marijuana Debate

In the United States, marijuana is classed as an illegal drug by the federal government. But nearly half the states have legalized it, to some degree. Proponents say some strains of marijuana might have exceptional health benefits, for treating pain or inflammation in chronic conditions such as cancer, multiple sclerosis and epilepsy. Shelley Schlender reports on a strain of medical marijuana developed in Colorado that is reputed to reduce seizures in childhood epilepsy
Video

Video Airbus Adds Metal 3D Printed Parts to New Jets

By the end of this year, European aircraft manufacturing consortium Airbus plans to deliver the first of its new, extra-wide-body passenger jets, the A350-XWB. Among other technological innovations, the new plane will also incorporate metal parts made in a 3-D printer. VOA's George Putic has more.
Video

Video Death Toll From Israel-Gaza Conflict Surpasses 700

Gaza officials say a shelling hit a compound housing a United Nations-run school in the Gaza Strip, killing more than a dozen people, during an Israeli offensive in the area. Heavy fighting between the Israeli military and Hamas militants continued on Thursday, pushing up the death toll. So far, more than 730 Palestinians and 35 Israelis have been killed in the conflict. VOA's Scott Bobb has the latest from Jerusalem.
Video

Video AIDS Conference Welcomes Exciting Developments in HIV Treatment, Prevention

Significant strides have been made in recent years toward the treatment and prevention of HIV, the virus that causes AIDS. This year, at the International AIDS Conference, the AIDS community welcomed progress on a new pill that may prevent transmission of the deadly virus. VOA’s Anita Powell reports from Melbourne, Australia.
Video

Video Israel Targets Gaza Supply Tunnels

The Israeli military has launched a ground operation in Gaza to destroy the myriad tunnels that may have been used to smuggle weapons to Hamas. VOA's Zlatica Hoke reports that could mean more hardship for the people of Gaza, who obtain some of their essential supplies through these underground passages
Video

Video Researchers Target Low-Cost Avatar Technology

Scientists at the University of Southern California Institute for Creative Technologies say 3-dimensional representations could revolutionize social media. Elizabeth Lee has more from Los Angeles.
Video

Video IAEA: Iran Turns its Enriched Uranium Into Less Harmful Form

Iran has converted its stockpiles of enriched uranium into a less dangerous form that is more difficult to use for nuclear weapons, according to the United Nations’ Atomic Energy Agency. The move complies with an interim deal reached with Western powers on Iran's nuclear program last year, in exchange for easing of sanctions. Henry Ridgwell reports for VOA from London.
Video

Video In Cambodia, HIV Diagnosis Brings Deadly Shame

Although HIV/AIDS is now a treatable condition, a positive diagnosis is still a life altering experience. In Cambodia, people living with HIV are often disowned by friends, family and the community. This humiliation can be unbearable. We bring you one Cambodian woman’s struggle to overcome a life tragedy and her own HIV positive diagnosis.

AppleAndroid

World Currencies

EUR
USD
0.7305
JPY
USD
101.53
GBP
USD
0.5830
CAD
USD
1.0656
INR
USD
60.075

Rates may not be current.