SNAP ANALYSIS: G20 progress on detailing rules revamp

LONDON (Reuters) - The G20 summit in Pittsburgh has made good progress in detailing and timing key regulatory changes aimed at strengthening the financial system after the worst crisis in 70 years, a draft communique showed.

* Leaders have made specific commitments on adopting Basel II rules on bank capital, phasing in higher bank capital levels, converging accounting standards, introducing a leverage ratio and calling for exchange trading of over-the-counter derivatives. Delivery won't be easy, however.

* Leaders set an end-2010 date to agree figures for higher and better quality capital levels. The work is being done by the Basel Committee on Banking Supervision which is reforming its Basel II bank capital accord to apply credit crunch lessons.

* Bank of England Governor Mervyn King has called for this to be done more quickly so that banks know sooner what they will need to do, but the deadline chosen is more realistic as fixing new capital levels will spark fierce debate.

* Leaders set an end-2012 date for implementing the tougher capital rules for banks. This gives industry the clear, phased-in timetable they want.

* The 2010 agreement and 2012 implementation deadlines mark a win for the United States. U.S. Treasury Secretary Tim Geithner ruffled European feathers earlier this month when he presented his own blueprint for beefing up bank capital at the G20 finance ministers' meeting in London which included the two deadlines.

* Remuneration: The communique backs guidelines the Financial Stability Board, which coordinates the G20's regulatory agenda, will publish on Friday on how pay packages at banks should be structured to avoid reckless risk taking. The FSB guidelines take effect immediately in all G20 countries.

* French hopes for caps on individual bonuses evaporate as the communique reiterates approach outlined by the FSB this month. Bonuses would only be limited to a percentage of total net revenues when it is "inconsistent with the maintenance of a sound capital base."

* Multi-year guaranteed bonuses must be avoided, a big chunk of variable pay must be deferred, tied to performance and subject to clawbacks.

* The clawback element is new for the G20 -- and lawyers sniff opportunities in challenging them in future -- but it appears that banks which comply with tougher capital requirements will have no big worries as they already structure pay packages along the lines outlined by the FSB.

* The battle over leverage ratios has ended in a compromise. The United States already require leverage ratios at banks and want them adopted globally. France is against imposing them globally, sensing a U.S. effort to supplant Basel II which the United States has yet to adopt in full.

* Still, the draft communique backs the introduction of a leverage ratio only as a "supplementary measure to Basel II" -- wording that will help reassure Europeans. Furthermore, it will be introduced by supervisors in the first instance, leaving some national wiggle room.

* The communique says the leverage ratio should be "migrated to Pillar 1" later on -- a step which hardwires it into law, leaving less national discretion. This will please the United States. The leverage ratio will also be "fully adjusted for differences in accounting" -- reassuring Germany.

* Europe has been pushing the United States to give a clearer commitment to fully adopting Basel II and it gets that in the draft communique which says all major G20 financial centers commit to adopting Basel by 2011.

* Commodities are also under the spotlight with more specific and harder language about the sector where volatility in oil prices have caught the eye of policymakers.

* The communique speaks of agreement to improve the regulation, functioning and transparency of financial and commodity markets to address "excessive commodity price volatility."

* Derivatives get far tougher and more detailed treatment than in last two G20 meetings by referring to the sector as a whole rather than just one part of it.

* The United States wants over-the-counter or privately negotiated derivatives contracts to be traded on an exchange where possible. The European Union is so far not fully convinced on the need for exchange trading but the United States appears to be winning the argument globally.

* The communique says all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and centrally cleared by the end of 2012 at the latest.

* This goes much further than prior G20 positions when it was agreed that only credit default swaps should be centrally cleared. The Pittsburgh communique also says all OTC derivatives contracts should be reported to trade repositories and non-centrally cleared contracts should be subject to higher capital requirements.

* The communique will cheer up accounting and auditing bodies across the world. For the first time it sets a clear date -- June 2011 -- to hammer out a single set of global accounting standards.

* This reinforces a timetable standards setters are trying to work to. Japan, Korea, India and Canada are set to adopt international standards around this time.

* It gives top-level political momentum to the convergence project which has appeared to stumble. The International Accounting Standards Board and U.S. Financial Accounting Standards Board are looking at radically different solutions to revamping their respective fair value rules.

* More tentative progress on perhaps the hardest challenge of all in revamping financial regulation -- how to put in place arrangements so that "too big to fail" banks can be wound down quickly without destabilizing the broader system, a core lesson from the Lehman Brothers crash a year ago that prompted the first G20 meeting.

* The draft communique sets and end of 2010 for financial institutions to put in place contingency and resolution plans -- also known as living wills and something Britain and United States are keen on. Financial experts say nothing short of an international treaty is needed due to big banks straddling many jurisdictions with differing insolvency laws.

(Reporting by Huw Jones, editing by Andy Bruce)