By Gillian Tett in London and Anuj Gangahar in New York
September 28 2006
SourceThree of the world's most powerful financial regulators have taken the unusual step of issuing a joint warning that individual nations cannot contain some of the risks posed by the explosive growth of derivatives and must collaborate across borders.
The dramatic pace of integration and innovation in over-the-counter global markets makes it increasingly difficult to solve problems with "a local or national solution", top officials from the UK Financial Services Authority, the Federal Reserve Bank of New York and the US Securities and Exchange Commission write in the Financial Times today.
"In a more integrated global market, we will increasingly find ourselves compelled to pursue borderless solutions," write Timothy Geithner, president of the New York Fed; Sir Callum McCarthy, chairman of the FSA; and Annette Nazareth, a commissioner at the SEC.
The comments come after leading global investment banks, institutional investors and international regulators met at the New York Fed yesterday to discuss industry initiatives to improve back-office systems for derivatives trading. The move follows concern last year that back-office backlogs were so serious they could create systemic problems if not addressed.
At the meeting, regulators said a process of co-operation between the US and European regulators last year had cut credit derivatives backlogs, but warned the industry still needed to tackle serious backlogs in the equity derivatives world. Their comments prompted the International Swaps and Derivatives Association to declare that it would take urgent action.
In the FT article, the regulators suggest the US-European initiative could act as a model for co-operation on broader issues.
"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. "To fix the credit derivatives problem, it was necessary to involve a large and diverse pool of financial institutions. No firm or national authority had the capacity to make progress on its own."
The comments will be watched in the financial industry. Although US and European regulators have co-operated behind the scenes in recent years, this has been discreet, since national supervisors have been expected to handle problems in their local markets. As a result, when Long Term Capital Management, the US hedge fund, imploded in 1998, the New York Fed facilitated rescue efforts by local, Wall Street investment banks.
However, the growing integration of capital markets is making it easier to transmit shocks across borders. When Amaranth, the US hedge fund, lost $6bn (£3.2bn) this month in US gas markets, this triggered a massive firesale of its loans in London.
Copyright The Financial Times Limited 2006