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

Multimedia US Defense Secretary: Iraqi Forces Lack 'Will to Fight'

Ash Carter criticizes Iraq's reaction to Islamic State; National Security Advisor Susan Rice echoed Carter's concerns in an interview on CBS More

Boko Haram Surrounds Havens With Land Mines

Chad and Cameroon say huge numbers of land mines planted by Boko Haram fighters along Cameroon's border with Nigeria are a danger to people, livestock and soldiers More

Women Peace Activists Cross Korean DMZ

Governments of Koreas give international delegation of women peace activists permission to pass through heavily fortified border, but some critics say symbolic crossing only benefits Pyongyang More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Turkey's Main Opposition Party Hopes for Election Breakthroughi
X
May 22, 2015 10:23 AM
Turkey’s main opposition Republican People’s Party has sought an image change ahead of the June 7 general election. The move comes after suffering successive defeats at the hands of the Islamist-rooted AK Party, which has portrayed it as hostile to religion. Dorian Jones reports from the western city of Izmir.
Video

Video Turkey's Main Opposition Party Hopes for Election Breakthrough

Turkey’s main opposition Republican People’s Party has sought an image change ahead of the June 7 general election. The move comes after suffering successive defeats at the hands of the Islamist-rooted AK Party, which has portrayed it as hostile to religion. Dorian Jones reports from the western city of Izmir.
Video

Video Europe Follows US Lead in Tackling ‘Conflict Minerals’

Metals mined from conflict zones in places like the Democratic Republic of Congo are often sold by warlords to buy weapons. This week European lawmakers voted to force manufacturers to prove that their supply chains are not inadvertently fueling conflicts and human rights abuses. Henry Ridgwell reports from London.
Video

Video Class Tackles Questions of Race, Discrimination

Unrest in some U.S. cities is more than just a trending news item at Ladue Middle School in St. Louis, Missouri. As VOA’s Kane Farabaugh reports, it’s a focus of a multicultural studies class engaging students in wide-ranging discussions about racial tensions and police aggression.
Video

Video Mind-Controlled Prosthetics Are Getting Closer

Scientists and engineers are making substantial advances towards the ultimate goal in prosthetics – creation of limbs that can be controlled by the wearer’s mind. Thanks to sophisticated sensors capable of picking up the brain’s signals, an amputee in Iceland is literally bringing us one step closer to that goal. VOA’s George Putic reports.
Video

Video Afghan Economy Sinks As Foreign Troops Depart

As international troops prepare to leave Afghanistan, and many foreign aid groups follow, Afghans are grappling with how the exodus will affect the country's fragile economy. Ayesha Tanzeem reports from the Afghan capital, Kabul.
Video

Video Poverty, Ignorance Force Underage Girls Into Marriage

The recent marriage of a 17-year old Chechen girl to a local police chief who was 30 years older and already had a wife caused an outcry in Russia and beyond. The bride was reportedly forced to marry and her parents were intimidated into giving their consent. The union spotlighted yet again the plight of many underage girls in developing countries. Zlatica Hoke reports poverty, ignorance and fear are behind the practice, especially in Asia and Africa.
Video

Video South Korea Marks Gwangju Uprising Anniversary

South Korea this week marked the 35th anniversary of a protest that turned deadly. The Gwangju Uprising is credited with starting the country’s democratic revolution after it was violently quelled by South Korea’s former military rulers. But as Jason Strother reports, some observers worry that democracy has recently been eroded.
Video

Video California’s Water System Not Created To Handle Current Drought

The drought in California is moving into its fourth year. While the state's governor is mandating a reduction in urban water use, most of the water used in California is for agriculture. But both city dwellers and farmers are feeling the impact of the drought. Some experts say the state’s water system was not created to handle long periods of drought. Elizabeth Lee reports from Ventura County, an agricultural region just northwest of Los Angeles.
Video

Video How to Clone a Mammoth: The Science of De-Extinction

An international team of scientists has sequenced the complete genome of the woolly mammoth. Led by the Swedish Museum of Natural History in Stockholm, the work opens the door to recreate the huge herbivore, which last roamed the Earth 4,000 years ago. VOA’s Rosanne Skirble considers the science of de-extinction and its place on the planet
Video

Video Blind Boy Defines His Life with Music

Cole Moran was born blind. He also has cognitive delays and other birth defects. He has to learn everything by ear. Nevertheless, the 12-year-old has had an insatiable love for music since he was born. VOA’s June Soh introduces us to the young phenomenal harmonica player.

VOA Blogs

World Currencies

EUR
USD
0.8957
JPY
USD
120.93
GBP
USD
0.6393
CAD
USD
1.2199
INR
USD
63.470

Rates may not be current.