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10 April 2014

Bloomberg: Global financial regulators revised derivative rules


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In a victory for banks, global financial regulators revised rules governing how much money must be set aside to cover losses by swaps traders, backing away from guidelines that firms warned would destabilise the $693 trillion derivatives market.


The Basel Committee on Banking Supervision’s final rule would require swaps dealers to hold less cash to protect against defaults than did a proposal published last year. The plan now applies a minimum 20 per cent risk weighting to money deposited at clearinghouses, which are third parties that guarantee the transactions. The change takes effect on 1 January 2017.

The interim plan had threatened to boost costs as much as 92 times, according to calculations by three banks shared with Bloomberg News. The risk from that original rule, which was last revised in 2013, was the higher costs could have caused market participants to flee rather than take advantage of the clearinghouses, making it more difficult for the third parties to safeguard the swaps market.

International regulators are trying to safeguard trades and bring more openness to a market whose secrecy and sheer size overwhelmed regulators in 2008. Where swaps had been one-on-one deals before, now they would be backstopped by third parties in clearinghouses that ensure everyone can pay, with the aim of avoiding emergency bailouts and panic. Basel is made up of regulators from 27 of the world’s largest economies and sets international bank supervisory guidelines.

The Basel committee had a fine line to walk. The lack of capital to back up losses in the private swaps market was the main reason why the US bailed out American International Group Inc. in 2008, Michael Barr, a law professor at the University of Michigan, said before today’s revision. Barr helped write the Dodd-Frank law, which aimed to make the US financial system more transparent and resilient, when he served as an assistant Treasury secretary from 2009 to 2010.

The reversal by Basel is "not just a victory for the banks, it’s a victory for the system", said Will Rhode, director of fixed-income research at New York-based Tabb Group LLC. By reducing the cost to clear trades, more banks will be able to offer clearinghouse services to their clients such as money managers and pension funds, he said. "That means more capacity for clearing will be there and the system won’t be working at cross purposes."

Full article

BCBS's revised captial standards, 10.4.2014



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