FSA sights set on compulsory derivative reporting

By Huw Jones

LONDON, June 7 (Reuters) – Financial markets watchdogs will make reporting of derivatives trades compulsory within 18 months in an attempt to improve their chances of spotting market bubbles, a senior UK regulator said on Tuesday.

Reporting of trades in the $600 trillion global derivatives market, which is dominated by London and New York, is one of the pledges world leaders made a year after the collapse of U.S. Lehman Brothers in 2008 left a trail of opaque contracts. “We expect it to be enforced in late 2012 or early 2013,” Alexander Justham, director of markets at the Financial Services Authority (FSA) told a conference in London.

Justham said trade reporting will help regulators to spot systemic risks and, later on, could play a role in supervising individual banks and help combat market manipulation by giving a clear picture on positions held.

The other pledges include standardising contracts so they can be cleared and, where appropriate, traded on an exchange or electronic platform.

This has raised fears in an industry dominated by just 14 dealers — the big banks like Goldman Sachs, Morgan Stanley and Deutsche Bank — that if the new rules are too strict it could be harder and more expensive for companies to use derivatives.

Participants at the “derivatives week” conference also expressed disquiet over the United States singling out Britain for partly causing the financial crisis.

U.S. Treasury Secretary Timothy Geithner called for global coordination of rules on Monday, saying there must not be a repeat of Britain’s pre-crisis light touch regulatory regime which “ended “tragically”.

“I find it a little odd he is pointing fingers at this stage,” John Damgard, president of the U.S. Futures Industry Association said at the opening session of the event.

Others, speaking privately, were less diplomatic.

“If the UK was light regulation, what was the United States — no regulation?,” one official said.

The FSA’s Justham, who regulates Europe’s top derivatives centre, sought to reassure the industry that a “one size fits all” approach would be avoided.

He also made light of Geithner’s speech, “He was clearly not referring to derivatives regulation as there was not that much in America at the time.”

Regulators must not be formulaic by “squeezing out the last pip” to force everything to be centrally cleared as this could increase risks, Justham said, adding that in some cases the mandatory clearing rule should not be implemented unless the right market infrastructure is in place.

The FSA has openly admitted its failings in the run up to the financial crisis and will be scrapped next year, with its powers divided between the Bank of England and a new Financial Conduct Authority.