Global regulators split over derivatives trading

LONDON (Reuters) - Global regulators are split over which electronic platforms can trade derivatives to improve transparency, raising the prospect of banks shifting business in the $600 trillion sector to less restrictive countries.

The International Organization of Securities Commissions (IOSCO) was tasked by world leaders to flesh out a pledge that standardized derivatives contracts should be centrally cleared and, where appropriate, traded on a platform by the end of 2012.

Derivatives in the over-the-counter (OTC) or off-exchange sector are largely transacted bilaterally among banks -- making it harder for supervisors to check who is exposed to which contracts when things go wrong, such as with the collapse of Lehman Brothers in 2008.

Hans Hoogervorst, chairman of IOSCO's technical committee, said in a report on Friday that platform trading of derivatives would boost competition, transparency and supervision -- as long as the conditions were not too narrow so that a wider range of contracts can be captured.

"IOSCO believes that it is appropriate to trade standardized derivatives contracts with a suitable degree of liquidity on organized platforms, provided that a flexible approach encompassing a range of entities that would qualify as such platforms is taken by regulators," Hoogervorst said.

Derivatives are under the spotlight again as the planned merger of Deutsche Boerse and NYSE Euronext creates a massive derivatives hub to compete with the CME.

Such exchanges hope to capture a big slice of derivatives under regulatory pressure to migrate onto platforms and some regulators are keen for competition from other providers.

The report has been sent to the Financial Stability Board which has been tasked by the world's 20 leading economies (G20) to coordinate tougher regulation following the financial crisis.

The FSB will update the G20's finance ministers on progress in regulation in Paris on Friday and Saturday.

ARBITRAGE CONCERNS

IOSCO members, which include BaFin from Germany, the U.S. Securities and Exchange Commission and the UK Financial Services Authority, all agreed on seven conditions for a platform.

These include no discrimination against participants, tailored posting prices before and after a trade, clear audit trails and transparent rules.

But there was disagreement on an eighth condition -- whether there would be additional benefits from requiring platforms to seek liquidity and trade with multiple liquidity providers and not just rely on one, such as a bank.

This goes to the heart of how easy it would be for non-exchanges to offer trading.

A new U.S. law says multiple participants must have the ability to execute or trade swaps by accepting bids and offers from multiple participants.

Some IOSCO members believe a less restrictive approach would capture more of the OTC sector and reduce risks overall.

So far the European Union, which includes Britain, one of the world's biggest derivatives centers, has focused on central clearing of standardized contracts, and only if they are liquid.

It has shown no sign of copying the United States to make trading of some standardized contracts mandatory on a platform whose characteristics are defined in a strict way.

IOSCO fears differing regulatory approaches could spur banks to shift trading in derivatives to more accommodating countries.

"The technical committee recognizes that, if some jurisdictions choose to establish requirements that give effect to all eight characteristics, while other jurisdictions do not, the resulting regulatory disparities have the potential to influence market participants' choice of venues in which to conduct business," IOSCO said.

It was critical that supervisors attempt to coordinate their actions as much as possible, the watchdog said.

(Editing by David Holmes)

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