Magazine article American Banker

International Regulators Issue Guidelines on Swaps

Magazine article American Banker

International Regulators Issue Guidelines on Swaps

Article excerpt

The explosive growth in the derivatives market has spurred unprecedented cooperation between international banking and securities regulators, who this week teamed up to issue supervision and risk management guidelines.

The Basel Committee on Banking Supervision and the technical committee of the International Organization of Securities Commissions issued separate papers that drew. the same conclusion: Sound internal risk management is essential for both banks and securities dealers in promoting the stability of the financial markets worldwide.

While the suggestions contained in the regulators' guidelines have been standard operating procedure in the United States for many years, the joint announcement is significant because it brings the market another step closer to global standardization.

A Different Kind of Risk

The risks associated with trading derivatives are no more severe than other risks faced by banks, but they are different, said Erik Musch, secretary general of the Basel committee.

"We've adopted a risk-based capital requirement to handle off-balance-sheet credit risk. But derivatives need another approach" because they are subject to more than just credit risk, he said Wednesday at an annual meeting of the International Swaps and Derivatives Association in New York.

Separately, attendees at the conference heard reports from U.S. regulators that new rules are not imminent. (See story on back page.)

Mr. Musch explained that it is not the cost of the derivatives contract that causes problems, but rather the potential replacement costs, should one of the parties involved fail to hold up its end of an agreement. …

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