Bankers’s war for derivatives’s control

We must remember that the bankers are not all equal . There are those who think how to make money. There are those who decide (or should decide ) how money goes around .

Put simply , the difference between bankers and central bankers that do business is all here .

The first are the standard bearers of laissez faire , and see how the wool over the eyes any interference in the free play of market forces .

The second are the standard-bearers of the regulation .

Pushing forward the simplification , one could say that in the wonderful world of finance, the historical conflict between state and market (which actually never existed , as we will see sooner or later ) has turned into a war between commercial bankers and central bankers.

The chronicles tell us one of the most exciting chapters of this conflict creeping, unfortunately relegated to the pages of financial newspapers. The material on the other hand which seem far-fetched : the management of the margins of derivatives not traded directly by the CCP.

Prior to scare you , remember that behind the complexity , in economic matters, it’s all about money.

Few weeks ago the Bis and IOSCO have released the final document that rules the margin requirements for OTC derivatives, those which are not compensated in the clearing house .

It may be useful to remember that IOSCO (International Organization of Securities Commissions) is an international bureaucratic entity that deals with the regulation of securities, then the various titles . The IOSCO is working closely with the G20 and the Financial Stability Board ( FSB) of the overall reform of regulation. IOSCO covers 95 % of the securities markets around the world , brings together 120 national regulators and 80 securities markets , including even those of the major emerging markets.

These two giants of the regulation have joined forces to bring order into one of the field most controversial of finance: OTC derivatives , in fact, is one of the major risk factors systemic to the financial world.

It tells us that central bankers won the first battle of the war between our two patrols bankers. But only thanks to the crisis , which is confirmed to be their better ally.

The idea to improve regulation of ​​OTC derivatives , in fact , comes in 2009 , at the height of the crisis that began under track a couple of years ago. The G20 countries , as usual frightened by the disasters caused by the greed of commercial bankers , decided to launch a program for the containment of systemic risk caused by these tools that experience had shown to be too opaque ( negotiated between operators without no transparency ) and risky ( for counterparty risk) .

The guidelines adopted by the G20 were four :

1 ) all standard OTC derivatives should be traded on the electronic platform ;

2 ) must be intermediatate by central counterparties ;

3) OTC contracts must be filed with the trade repositories  to increase transparency ;

4 ) Derivatives not mediated by central counterparties should be subject to higher capital requirements .

In 2011, the G20 established that it was necessary to fix the margin requirements , ie capital paid in for the opening of a position, for all derivatives that are not mediated by the CCP, and he entrusted to the BIS and IOSCO to take care of the boring stuff.

And so we come to the rules presented, which involve a heavy surveillance of the financial operators.

The new rules provide that persons who carry out OTC derivative transaction without going through the clearing house will have to pay initial margins “commensurate with the counterparty risks related to such transactions .” It means that if they want to play with fire they will put on the table a lot more matches on the table.

Metaphors aside , pour margins ” commensurate ” actually reduces the possibility for the operators to increase indefinitely leverage : less resources to play, less damage.

The aim is clear and declared by the duo of regulators : “Providing companies the right incentives (or disincentives in the case of margins) to use central clearing , while managing the overall impact of liquidity.” So give power to CCPs in place of the trading room of the big banks .

To allow time for operators to adapt , regulators set a span of four years for the entry into force of the new rules.

To understand the significance of this reform, it’s worth reading the intervention of Andreas Dombret , a member of the Bundesbank board , published on August 2 on Borsen – Zeitung.

Our central banker says that to date only 13% of the OTC derivatives are cleared through central counterparties . ” A small number of large banks – says Dombret – play an important role in these negotiations .” And this creates a significant risk that the counterparty may be reduced “by moving these negotiations on the clearing house that in the future will be able to handle simultaneous default .” A revolution that according Dombret similar to a ” juggernauts of the global financial system .”

The commercial bankers chew bitter. Their alarms on the riskiness of the clearing house , willingly usually reported by the Financial Times on July 7 , literally have fallen on deaf ears. Are too recent memories of damages caused by laissez faire.

But losing a battle ( and a substantial slice of profits ) does not mean losing the war .

On the contrary . The same Dombret , in a speech on August 30, at the symposium on the financial market , which was held in Alpbach, recalled that the strength of regulation finds its limit in the great imagination shown by the commercial bankers in devising solutions to circumvent the rules so painstakingly developed .

In his speech, the German central banker point the finger on the shadow banking , ie on the set of actors and activities that operate outside of the regulation for the simple fact that they are not banks. ” The available data indicate that we are facing a very serious challenge ,” says Dombret . So much so that the shadow banks were the subject of the recommendations recently published by the Financial Stability Board in view of the G20 summit Russian, where central bankers hope are discussed .

The problem , he explains, is that ” the shadow banking system adapts very quickly in order to circumvent the measures of adjustment .”

Without the law , there is always deception.

And so the war continues.


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