June 15, 2012 / 9:00 AM / 5 years ago

G20 task force ups derivatives reform pressure

LONDON, June 15 (Reuters) - The world's top derivatives markets are making good progress in implementing tougher rules for the $640 trillion sector but much still needs to be done, a G20 task force said on Friday.

The new rules will force banks to record and clear transactions and are among the world's core response to the financial crisis that toppled Lehman Brothers, the U.S. bank whose fate was sealed because of its huge derivatives holdings.

The G20 has agreed an end of 2012 deadline for introducing the rules and with just six months to go "much remains to be completed", the Financial Stability Board said in a report prepared for next week's summit of G20 leaders in Mexico.

"Broadly speaking, the jurisdictions currently with the largest markets in OTC derivatives - the EU, Japan and the U.S. - are the most advanced in structuring their legislative and regulatory frameworks," the FSB report said.

"They expect to have regulatory frameworks in place by end-2012 and practical implementation within their markets is well underway," it added.

G20 leaders agreed at the height of the 2007-09 financial crisis that the vast off-exchange derivatives market must be more transparent by recording all trades which are currently largely conducted privately between banks.

Transactions should be centrally cleared and traded on an electronic platform where possible. The opaqueness of derivatives alarmed regulators as they tried to untangle who was exposed to Lehman.

The bulk of derivatives are traded in London and New York, and the FSB said several countries were slow in meeting the G20 pledges because they are waiting for key elements in the EU, United States and Japan to be put in place, such as what types of contracts must be cleared.

The FSB said laggards have no reason to delay any further.

"With international standard setting and policy guidance now largely complete, jurisdictions need to promptly develop and implement legislative and regulatory frameworks," it said.

But the industry says regulators need to speed up too.

Just 14 big banks like Goldman Sachs, Deutsche Bank , HSBC and Morgan Stanley dominate derivatives trading.

They are waiting for the final, and most costly, piece in the regulatory puzzle -- how much margin they must hold against uncleared trades, and how much capital they must hold against cleared trades.

These "magic numbers" will change the economics of the industry.

The FSB, helped by the global Basel Committee on Banking Supervision and the IOSCO securities regulators umbrella group, were a s ked by the G20 to present a proposal on margining on uncleared trades for next week's summit.

The regulators have been unable to meet that deadline.

A person familiar with the work said the aim is to put out a proposal in July for a global minimum margin on uncleared derivatives trades for consultation and finalise it by November.

The difficulty is ensuring there is an incentive to centrally clear trades.

"There are still a lot of moving parts here," the person said.

A proposal on capital requirements on cleared trades is also due in coming weeks.

Global regulators hope the G20 next week will reconfirm its support for introducing the Basel III global bank capital and liquidity requirements from next January -- which also impact derivatives -- so that laggard countries come under pressure to catch up.

There is relief in regulatory circles that the United States has finally said how it will implement Basel.

"The dynamic has changed with the publication of the U.S. rules," the person familiar with the regulatory work said.

Some EU lawmakers have threatened to delay implementing Basel in Europe until the United States shows it will meet the January deadline.

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