By Huw Jones
LONDON, Feb 13 (Reuters) - New rules on how much collateral
is needed to back derivatives trades are unlikely to be
finalized before September, leaving markets in limbo as global
regulators seek to minimize potential harm to economic recovery.
World leaders had requested that the rules be in place by
the end of 2012. However, agreement has proved difficult because
of the huge demand for collateral at a time when banks are
already being forced to beef up their capital reserves.
The delay has left markets second-guessing the changes to
how the $640 trillion derivatives market will function and plug
gaps highlighted by the financial crisis.
David Wright, secretary general of the International
Organisation of Securities Commissions, comprising all the
world's main market regulators, said on Wednesday that the final
shape of the rules on posting collateral, also known as
margining, needed further consideration.
"We need to do more economic thinking on the balance of the
overall package," he told a conference held by the Association
for Financial Markets in Europe, a banking trade body.
The regulators are looking at the level of high-quality
assets, such as government bonds, that a bank or company holding
uncleared derivatives will have to post in case of default.
Mark Carney, who heads the global Financial Stability Board
that is overseeing the drafting of the rules, expects them to be
completed by September, Wright added.
TRILLION-DOLLAR ESTIMATE
Regulators are finding it difficult to determine how much
collateral should be posted on uncleared derivatives trades.
Cleared trades, which are contracts squared up in a process
backed by a default fund in case one side of the trade goes
bust, are considered safer than uncleared trades.
World leaders have said that there should be an incentive to
clear trades, suggesting that they want higher collateral
requirements on uncleared transactions.
Banks, meanwhile, have warned that a trillion dollars or
more of extra collateral will be needed for posting against
trades if the new rules are too severe.
The consultation on "near-final rules" will be launched
within days, Wright said, and a phase-in period after September
is almost inevitable.
The extra time being taken to get the new derivatives rules
right is the latest sign of how regulators are trying to find
ways to avoid forcing banks to tie up too much capital, thereby
making it harder to lend to companies to generate growth
struggling economies.
In January, banking regulators eased and delayed full
implementation of a separate rule that will require banks to
build cash buffers to withstand sudden market shocks unaided.
Robert Stheeman, chief executive of the UK Debt Management
Office, said that markets were innovative enough to find ways
around any collateral shortage.
Patricia Mosser, senior vice president at the Federal
Reserve Bank of New York, also cast doubt on the "eye popping"
estimates for possible collateral shortages, saying that markets
are already moving to help to bridge any gap.
"Innovation in collateral management is almost like a growth
industry," Mosser told the conference.
(Additional reporting by William James)
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