Derivatives rules softened in victory for banks

New York, April 10: In a victory for banks, global financial regulators backed away from earlier guidelines that the firms had warned would destabilise the $693-trillion derivatives market.

The Basel Committee on Banking Supervision’s final rule, released on Thursday, will require banks that broker swaps trades to set aside much less money to protect against a default versus a proposal published last year. The plan now applies a minimum 20% risk weighting to money de posited at clearinghouses, which are thirdparty guarantors that back the transactions, down from 1,250% in the original proposal. The change takes ef fect on January 1, 2017.

The prior proposal threatened to boost costs as much as 92 times, according to calculations by three banks shared with Bloomberg News.

The risk from the original rule was the higher costs could have caused market participants to flee rather than take advantage of the clearinghouses, making it more difficult for them to safeguard the market.

“They really had people spending a year thinking about it, and they reversed it. The banks should be very happy,” said Chris Cononico, president of GCSA, a New York-based underwriter that’s seeking to insure derivatives clearinghouses. The proposed rule “seems to have evaporated”, he said.

The world’s largest derivatives brokers at the end of 2013 were owned by Goldman Sachs Group, JPMorgan Chase, Newedge Group, Deutsche Bank, Morgan Stanley and the Merrill Lynch division of Bank of America, according to the US Commodity Futures Trading Commission.

The largest swaps clearinghouse owners are exchanges: CME Group, IntercontinentalExchange Group, London Stock Exchange Group and Deutsche Boerse.

Bloomberg

The headquarters of the Bank for International Settlements in Basel, Switzerland