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

Katrina Brought Enduring Changes to New Orleans

The city’s recovery is the result of the people and culture the city is famous for, as well as newcomers and start-up industries More

China to Open Stock Markets to Pension Funds

In unprecedented move, government to soon allow local pension funds to invest up to $94 billion in domestic shares More

Magical Photo Slides Show Native Americans in Late 1800s

Walter McClintock spent 20 years photographing the Blackfoot Indians and their vanishing culture at the dawn of the modern age More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Colombians Flee Venezuela as Border Crisis Escalatesi
X
August 27, 2015 2:08 AM
Hundreds of Colombians have fled Venezuela since last week, amid an escalating border crisis between the two countries. Last week, Venezuelan President Nicolas Maduro ordered the closure of a key border crossing after smugglers injured three Venezuelan soldiers and a civilian. The president also ordered the deportation of Colombians who are in Venezuela illegally. Zlatica Hoke reports.
Video

Video Colombians Flee Venezuela as Border Crisis Escalates

Hundreds of Colombians have fled Venezuela since last week, amid an escalating border crisis between the two countries. Last week, Venezuelan President Nicolas Maduro ordered the closure of a key border crossing after smugglers injured three Venezuelan soldiers and a civilian. The president also ordered the deportation of Colombians who are in Venezuela illegally. Zlatica Hoke reports.
Video

Video Is China's Economic Data Accurate?

Some investors say China's wild stock market gyrations have been made worse by worries about the reliability of that nation's economic data. And some critics say the reports can mislead investors by painting an unrealistically-strong picture of the economy. A key China scholar says Beijing is not fudging ((manipulating)) the numbers, but that the economy is evolving quickly from smoke-stack industries to services, and the ways of tracking new economic activity are falling behind the change. V
Video

Video Next to Iran, Climate at Forefront of Obama Agenda

President Barack Obama this week announced new initiatives aimed at making it easier for Americans to access renewable energy sources such as solar and wind. Obama is not slowing down when it comes to pushing through climate change measures, an issue he says is the greatest threat to the country’s national security. VOA correspondent Aru Pande has more from the White House.
Video

Video Shipping Containers Provide Experimental Housing

Housing prices around the San Francisco Bay area are out of reach for many people, so some young entrepreneurs, artists and tech industry workers are creating their own houses using converted shipping containers. But as VOA's Mike O’Sullivan reports from Oakland, the effort requires ingenuity and dealing with restrictive local laws.
Video

Video Arctic Draws International Competition for Oil

A new geopolitical “Great Game” is underway in earth’s northernmost region, the Arctic, where Russia has claimed a large area for resource development and President Barack Obama recently approved Shell Oil Company’s test-drilling project in an area under U.S. control. Greg Flakus reports.
Video

Video Philippine Maritime Police: Chinese Fishermen a Threat to Country’s Security

China and the Philippines both claim maritime rights in the South China Sea.  That includes the right to fish in those waters. Jason Strother reports on how the Philippines is catching Chinese nationals it says are illegal poachers. He has the story from Palawan province.
Video

Video Technique May Eliminate Drill-and-Fill Dental Care

Many people dread visiting dentists because they're afraid of drills. Now, however, a technology developed by a British firm promises to eliminate the need for mechanical cleaning of dental cavities by speeding a natural process of tooth repair. VOA’s George Putic reports.
Video

Video China's Spratly Island Building Said to Light Up the Night 'Like A City'

Southeast Asian countries claim China has illegally seized territory in the Spratly islands. It is especially a concern for a Philippine mayor who says Beijing is occupying parts of his municipality. Jason Strother reports from the capital of Palawan province, Puerto Princesa.
Video

Video Ages-old Ice Reveals Secrets of Climate Change

Ice caps don't just exist at the world's poles. There are also tropical ice caps, and the largest sits atop the Peruvian Andes - but it is melting, quickly, and may be gone within the next 20 years. George Putic reports scientists are now rushing to take samples to get at the valuable information about climate change locked in the ice.
Video

Video French Experiment in Integrating Roma Under Threat

Plans to destroy France’s oldest slum have sparked an outcry on the part of its Roma residents. As Lisa Bryant reports from the Paris suburb of La Courneuve, rights groups argue the community is a fledgling experiment on integrating Roma who are often outcasts in many parts of Europe.
Video

Video Kenyans Turn to Agriculture for Business

Each year Kenyan universities continue to churn out graduates for the job market despite the already existing high rate of unemployment among youth in the country. Some of these young men and women have realized that agriculture can be as rewarding as any other business or job, and they are resorting to agribusiness in large numbers as a way of tackling unemployment. Rael Ombuor reports for VOA.
Video

Video First Women Graduate Elite Army Ranger School

Two women are making history for the U.S. Army by proving they are among the toughest of the tough. VOA's Carla Babb reports from Fort Benning, Georgia as 94 men and those two women rise as graduates of the difficult Ranger school.

VOA Blogs

World Currencies

EUR
USD
0.8874
JPY
USD
120.83
GBP
USD
0.6497
CAD
USD
1.3271
INR
USD
66.162

Rates may not be current.