Thursday, March 25, 2010

Tighter OTC derivatives rules loom

Original posted in FT Alphaville by Aline van Duyn:

Regulators are to unveil tough rules in the coming weeks that will require trading information in over-the-counter derivatives - including the identity of investors - to be easily passed on to global financial watchdogs.

The rules, being formulated by the 40-member OTC Derivatives Regulators' Forum - which includes the Federal Reserve and the Securities and Exchange Commission from the US, the UK's Financial Services Authority and European banking regulators - will apply to credit, interest rate and equity derivatives traded off exchange.

The rules come on the back of a transatlantic row over the lack of disclosure to regulators of credit derivatives trades in Greek debt. This pushed the body in charge of collecting global data for credit derivatives - the DTCC Trade Information Warehouse - to reveal more information to financial watchdogs.

Fresh guidelines from the DTCC, made public this week, will give regulators "unfettered access" to its information, including the identity of trading counterparties. Under its previous rules, the DTCC revealed counterparties only with their prior consent.

The heightened transparency, which is likely to apply to trade warehouses or repositories for interest rate derivatives and equity derivatives, shows the direction regulators are leaning.

"If someone like the SEC wants to investigate insider trading, the idea is that they can go to a single source, and get trades on credit derivatives on a particular US company," said one regulator involved in the talks.

"If the Greek authorities want to investigate who's trading in Greek [credit default swaps], they should be able to do this easily too."

The opacity of the privately traded OTC derivatives market became strikingly clear after undetected CDS exposure at AIG led to its near-collapse and required a bail-out of the insurance company by the US government.

That plus fears of a chain reaction of losses if derivatives dealers went bust - as nearly happened with the demise of Bear Stearns and bankruptcy of Lehman Brothers - and the growing influence of derivatives prices on trading in shares has led to the creation of information warehouses for derivatives.

Most progress has been made in credit derivatives. The Depository Trust & Clearing Corporation, a large provider of post-trade services such as clearing, set up the credit derivatives warehouse last year. It has become an important information source for regulators on credit derivatives.

TriOptima, a Swedish group, is setting up a warehouse for global interest rate swaps and the DTCC is setting up a warehouse for OTC equity derivatives.

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