Rollout of Final Derivatives Rules Leaves Patchy Global Picture of Risks

Eight years since Lehman Brothers' collapse sent the financial system into a tailspin, a remaining reform to make derivatives safer will be rolled out from next week, though regulators still won't have a full snapshot of risks in the $493 trillion sector.

When the US bank went bust, regulators were unable to see at a glance who was on the other side of Lehman's derivatives trades to check if they had enough cash to cover defaults.

It led to an overhaul of the swaps market used by banks and companies to insure themselves against unexpected moves in interest rates or commodity prices like jet fuel.

"We are nearing the end of the reform process," said Scott O'Malia, chief executive of the International Swaps and Derivatives Association ("ISDA"), an industry body.

In Japan and the United States from 1 September banks will have to set aside for the first time an "initial" sum of cash or margin to cover swaps contracts that are not being centrally cleared.

The European Union, Australia, Hong Kong and Singapore will follow suit later, failing to stick with the global deadline.

A "variation" margin to cover day-to-day market price fluctuations will be added next March, but half of the Group of 20 economies ("G20") are already behind on this, with China lagging the furthest behind.

"Such jurisdictions should urgently take steps to implement these reforms," the G20's regulatory task force, the Financial Stability Board, said in an update on its derivatives reforms.

O'Malia said the amount of money users of uncleared swaps will have to hold will be higher than in the past, and higher than for cleared swaps or derivatives traded on an exchange.

"This final piece will affect the cost of non-cleared products, as users will need to fund margin requirements," said O'Malia who in his former job as a commissioner at the US Commodity Futures Trading Commission helped to write the derivatives rules.

"Margin, capital and other regulatory requirements are together affecting the costs of using non-cleared derivatives. This could force end-users to change their behaviour and rethink tailoring hedges to match and offset risk," O'Malia said.

One reform already introduced is requiring derivatives trades to be recorded at a trade repository, but legal barriers to sharing this information among regulators to build up a full picture of risks at a given bank still remain.

The FSB has set a June 2018 deadline for removing the barriers, nearly a decade after the Lehman crash.

Many G20 countries also need to implement rules for trading swaps on a platform.