LONDON Regulators have been told to work faster to iron out cross-border spats over new rules to reduce risks in the $650 trillion derivatives market as progress stalls ahead of a December deadline.
The vast market has traditionally been opaque, with contracts traded between big banks like Goldman Sachs, Deutsche Bank and HSBC. The reforms will alter the sector's economics and business models while raising costs for customers.
The Group of 20 economies (G20) agreed in 2009 during the financial crisis that derivatives like interest rate swaps and credit default swaps should be traded on electronic platforms, centrally cleared and recorded, by the end of 2012.
The changes will allow regulators to spot risks and identify who is behind each transaction faster and avoid the confusion seen when U.S. insurer AIG hit the rocks in 2008 and needed a $182 billion bailout.
The Financial Stability Board (FSB), the G20's regulatory arm, said in a report for a G20 finance ministers' meeting in Mexico this weekend the industry was being held back by uncertainty over how new rules will mesh together globally.
"Market infrastructure is in place and can be scaled up. Regulatory uncertainty remains the most significant impediment to further progress and to comprehensive use of market infrastructure," the report said.
Progress in clearing and reporting trades has "plateaued" in the past two years as the sector awaits clarity on how national rules will work seamlessly amid so much cross-border trading.
"However, progress to date in cross-border discussions has been slow. This risks delaying the full and timely implementation of the G20 objectives," the FSB said.
The bulk of derivatives are traded through New York and London while users are spread across the world.
Finance ministers from Britain, France and Japan asked the U.S. Commodity Futures Trading Commission this month to curb the cross-border reach of its new derivatives rules amid signs that the global derivatives market was already fragmenting.
Some market participants are choosing non U.S. banks to avoid the cost and red tape of having to comply with American and their own domestic rules.
The FSB said 10 percent of outstanding credit default swaps - a type of insurance against the default of a company or country - were being centrally cleared by the end of August.
The figure for interest rate swaps, which insure against adverse changes in borrowing costs, was nearer 40 percent.
Clearing ensures a transaction is completed, irrespective of whether one side of the trade goes bust, and the FSB said by June clearing houses were available for some products in the five asset classes the reforms target.
So far, details on well over 90 percent of off-exchange traded interest rate swaps and credit default swaps were being recorded at a trade repository, the FSB said.
But industry officials say rules on how much extra capital they will need to back transactions have yet to be finalized, a key piece in the jigsaw that will determine whether they will continue to trade some contracts at all.
(Reporting by Huw Jones; Editing by Helen Massy-Beresford)