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

Report: $60 Billion Leaves Africa Illegally Each Year

Report by a joint UN and African Union panel says African countries need to take concrete measures to stop billions of dollars from illegally being moved out of continent each year More

Video Spy Murder Probe Likely to Further Strain British-Russian Relations

Some analysts say Russian Tu-95 bombers were flying near British airspace to warn Britain about an inquest into a murdered Russian spy More

Mugabe Defends Image Amid Controversy at Close of AU Summit

He rejects concerns about how the West might perceive his leadership, saying he's focused on African development More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Spy Murder Probe Likely to Further Strain British-Russian Relationsi
X
Henry Ridgwell
January 31, 2015 10:50 PM
Relations between Russia and the West are set to become even more strained amid an inquiry in London into the murder of a former Russian spy. Lawyers at the inquiry accuse Russian President Vladimir Putin of directing a "mafia state." Meanwhile, Royal Air Force fighters intercepted Russian bombers close to British airspace this week, prompting authorities to summon Moscow’s ambassador. Henry Ridgwell reports.
Video

Video Spy Murder Probe Likely to Further Strain British-Russian Relations

Relations between Russia and the West are set to become even more strained amid an inquiry in London into the murder of a former Russian spy. Lawyers at the inquiry accuse Russian President Vladimir Putin of directing a "mafia state." Meanwhile, Royal Air Force fighters intercepted Russian bombers close to British airspace this week, prompting authorities to summon Moscow’s ambassador. Henry Ridgwell reports.
Video

Video Ukrainian Neighborhood Divided Over Conflict

People in eastern Ukraine’s Donetsk and Luhansk districts find themselves squarely in the path of advancing Russian-backed rebels, who want to take back the territory they held at the beginning of the conflict last year. Many local residents are afraid, but others would welcome the change, even when a rebel shell lands in their neighborhood. From the Luhansk district, 15 kilometers from where the Ukrainian government marks the front line, VOA’s Al Pessin reports.
Video

Video Threat of Creeping Lava Has Hawaiians on Edge

Residents of the small town of Pahoa on the Big Island of Hawaii face an advancing threat from the Kilauea volcano. Local residents are keeping a watchful eye on creeping lava. Mike O’Sullivan reports.
Video

Video Jefferson's Library Continues to Impress, 200 Years Later

Two hundred years after the U.S. Congress purchased a huge collection of books belonging to former President Thomas Jefferson, it remains one of America’s greatest literal treasures and has become the centerpiece of Washington’s Library of Congress. VOA’s Deborah Block reports.
Video

Video Egypt's Suez Canal Dreams Tempered by Continued Unrest

Egypt plans to expand the Suez Canal, raising hopes that the end of its economic crisis may be in sight. But some analysts say they expect the project may cost too much and take too long to make life better for everyday Egyptians. VOA's Heather Murdock reports.
Video

Video Pro-Kremlin Youth Group Creatively Promotes 'Patriotic' Propaganda

As Russia's President Vladimir Putin faces international pressure over Ukraine and a failing economy, unofficial domestic groups are rallying to his support. One such youth organization, CET, or Network, uses creative multimedia to appeal to Russia's urban youth with patriotic propaganda. VOA's Daniel Schearf reports.
Video

Video Filmmakers Produce Hand-Painted Documentary on Van Gogh

The troubled life of the famous 19th century Dutch painter Vincent van Gogh has been told through many books and films, but never in the way a group of filmmakers now intends to do. "Loving Vincent " will be the first ever feature-length film made of animated hand-painted images, done in the style of the late artist. VOA’s George Putic reports.
Video

Video Issues or Ethnicity? Question Divides Nigeria

As Nigeria goes to the polls next month, many expect the two top presidential contenders to gain much of their support from constituencies organized along ethnic or religious lines. But are faith and regional blocs really what political power in Nigeria is about? Chris Stein reports.
Video

Video Rock-Consuming Organisms Alter Views of Life Processes

Scientists thought they knew much about how life works, until a discovery more than two decades ago challenged conventional beliefs. Scientists found that there are organisms that breathe rocks. And it is only recently that the scientific community is accepting that there are organisms that could get energy out of rocks. Correspondent Elizabeth Lee reports.
Video

Video Paris Attacks Highlight Global Weapons Black Market

As law enforcement officials piece together how the Paris and Belgian terror cells carried out their recent attacks, questions are being asked about how they obtained military grade assault weapons - which are illegal in the European Union. As VOA's Jeff Swicord reports, experts say there is a very active worldwide black market for these weapons, and criminals and terrorists are buying.
Video

Video Activists Accuse China of Targeting Religious Freedom

The U.S.-based Chinese religious rights group ChinaAid says 2014 was the worst year for religious freedom in China since the end of the Cultural Revolution. As Ye Fan reports, activists say Beijing has been tightening religious controls ever since Chinese leader Xi Jinping came to office. Hu Wei narrates.
Video

Video Theologians Cast Doubt on Morality of Drone Strikes

In 2006, stirred by photos of U.S. soldiers mistreating Iraqi prisoners, a group of American faith leaders and academics launched the National Religious Campaign Against Torture. It played an important role in getting Congress to investigate, and the president to ban, torture. VOA's Jerome Socolovsky reports.

Circumventing Censorship

An Internet Primer for Healthy Web Habits

As surveillance and censoring technologies advance, so, too, do new tools for your computer or mobile device that help protect your privacy and break through Internet censorship.
More

All About America

AppleAndroid

World Currencies

EUR
USD
0.8845
JPY
USD
117.71
GBP
USD
0.6643
CAD
USD
1.2669
INR
USD
62.019

Rates may not be current.