Yahoo News
September 28, 2006
SourceLONDON (AFP) - Leading officials from three of the world's most powerful financial regulators have warned in a joint letter that countries must join forces to help contain risks posed by the explosive growth of derivatives trading, the Financial Times reported.
Progress has been made during the past year, but "there is still work to do", officials from the UK Financial Services Authority, the Federal Reserve Bank of New York and the US Securities and Exchange Commission wrote in the business daily.
"Weaknesses remain and, apart from operational risk, the market faces formidable challenges in measuring and managing financial risks."
A derivative is a tradable financial instrument whose value is determined by the value of one or more underlying financial assets, such as stocks, bonds, commodities and currencies.
Derivatives are bought or sold to tackle risk linked to the underlying security.
In the FT on Thursday, Timothy Geithner, president of the New York Fed; Callum McCarthy, chairman of the FSA; and Annette Nazareth, a commissioner at the SEC wrote:
"In a more integrated global market, we will increasingly find ourselves compelled to pursue borderless solutions."
Their joint letter came after leading global investment banks, institutional investors and international regulators met at the New York Fed on Wednesday to discuss industry initiatives to improve back-office systems for derivatives trading.
The move followed concerns last year that back-office backlogs were so serious they could create systemic problems if not addressed, the FT said.
At the meeting, regulators said a process of co-operation between US and European regulators last year had cut credit derivatives backlogs.
"In the case of derivatives, a local or national solution would have been insufficient to protect domestic financial markets from the risks posed by market practices," they said.
The regulator officials meanwhile warned in their letter that the industry still needed to tackle serious backlogs in equity derivatives.