LONDON Banks will have to set aside capital to back their risky financial derivatives trades under draft rules published by global regulators on Friday to safeguard market stability.
The Basel Committee of Banking Supervisors from nearly 30 countries set out the final pieces in its complex jigsaw of reforms called for by world leaders during the financial crisis to make derivatives more transparent and risks better covered.
Regulators were alarmed at how long it took them to find out who was on the other side of derivatives trades of ailing institutions like Lehman bank, which collapsed in 2008.
The rules will reshape the $633 trillion off-exchange market for interest rate, commodity and credit default swaps.
These contracts are traded bilaterally by banks but the reforms will require them to pass through third-party clearing houses backed by a default fund.
The draft rules show how to calculate the amount of capital banks must set aside to cover their exposures to clearers, replacing Basel's interim rules from last year.
No capital is set aside currently on such exposures.
The changes to the interim rules also make sure that the capital charges on cleared trades will not be higher than if they had been left uncleared, the committee said.
Under the rules, banks will have to set aside less capital on trades that pass through clearing houses than ones left uncleared.
"There was also concern that, in some cases, the interim capital treatment might not create the appropriate incentives for maintaining generous default funds," the committee said in a statement.
Some regulators worry that clearing houses will become new centers of risk and should have big enough default funds.
The reforms were meant to be ready by the end of 2012 but their complexity has led to delays, giving banks more time to adjust to a more expensive system for trading derivatives.
The draft rules are open for public consultation and the committee will gather data from clearing houses to fine-tune the rules, which it will finalize in December with introduction in 2014 at the earliest.
(Reporting by Huw Jones; Editing by Mark Heinrich)