Central clearing OK for bulk of OTC derivatives-FSB

FRANKFURT Aug 27 (Reuters) - Regulators are confident the bulk of the $615 trillion over-the-counter derivatives market can be centrally cleared, which will cut risks to the financial system, a top regulator said on Friday.

"Huge quantities -- 80 percent probably -- of (products) are plain vanilla, over-the-counter derivatives that are very standardised," said Svein Andresen, secretary general of the Financial Stability Board (FSB).

A large amount of the business that is done between the dealer firms or banks is also very commoditised, he said.

"It is in between the financial institutions that we are very keen to remove or shrink that interconnectedness exposure," he told Reuters on the margins of a financial conference.

International financial supervisors have intensified efforts to scrutinise the largely hidden market for derivatives in the wake of the financial crisis, fearing that problems with complex financial products at one bank could quickly envelop others.

The efforts have sparked a debate between banks and supervisors over the suitability of some contracts for central clearing.

There are also concerns that pushing large amounts of contracts into a handful of clearing houses will concentrate too much risk.

New rules governing derivatives were already in place in the United States and were expected soon in Europe, Andresen said, adding that international regulators were working intensely to ensure that the new rules were consistently implemented.

The Basel-based FSB expects to publish a report on derivatives in November, he said.

It has already recommended to the Group of 20 developed and emerging market nations that centralised clearing be applied to a large proportion of the derivatives market, with reporting of uncleared derivatives transactions to a trade repository.

The FSB is setting out principles and criteria that national authorities will use to judge what can be cleared centrally.

"It is very important that countries do not compete on definitions so that we do not wind up with regulatory arbitrage," Andresen said.

"Clearing corporations are going to be the risk-takers and have to make judgments about the risks they can take in and neutralise," Andresen said, adding that the houses would be subject to additional requirements about the capital resources they needed to hold due to the concentration of risk.

"We'll have to see over time how this works out and place the incentives so that we push more into what can sensibly and soundly be centrally cleared into central clearing houses," he said, adding that this would raise the capital costs of uncleared over-the-counter derivatives contracts.

For related story on EU derivatives click on [ID:nLDE67Q1A2] (Reporting by Jonathan Gould; Editing by David Cowell)