LONDON Feb 10 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
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 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 its 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."
From Wednesday, everyone who trades derivatives in the EU
must report their transactions to one of six new bodies known as
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 done in 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.
But 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," Michelle
Price, a policy director at the Association of Corporate
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 recognise these challenges and will be proportionate in
our response to any instances of non-compliance. Firms should
however recognise 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 Organisation 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,
which operates a repository in the EU, said it will be ready to
share information from 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 centre for regulatory strategy said
a clear and accurate global snapshot for regulators is at least
four years away - nearly a decade since Lehman crashed.