OTC Derivatives Rules’ Benefits Outweigh Costs, Basel Group Says

Tougher rules for trading in over-the-counter derivatives will deliver economic benefits that outweigh the costs they impose on banks, a study found.

A group of supervisors and central bankers set up by the Bank for International Settlements estimated that when regulators have stricter standards in place, they will boost global economic output by 0.12 percent per year and the potential for financial crises will be reduced.

Regulators and banks should try to have the largest number of derivatives trades as possible pass though clearinghouses, the group said in a statement today. The market for OTC derivatives, which are traded away from exchanges and other regulated venues, should be based around a “modest number” of clearinghouses, the Basel, Switzerland-based said.

Nations are trying to bolster and align their rules for the $633 trillion market for swaps and other OTC derivatives, which became a target for reinforced oversight after the 2008 collapse of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the largest traders in credit-default swaps. Global regulatory plans include boosting the use of clearinghouses, pushing activity onto regulated markets and requiring banks to put up more collateral against their trades.

“While these reforms have clear benefits, they do entail costs,” the group said in the report. “Requiring OTC derivatives users to hold more high-quality, low-yielding assets as collateral lowers their income. Similarly, holding more capital means switching from lower-cost debt to higher-cost equity financing. As a consequence, institutions may pass on higher costs to the broader economy in the form of increased prices.”

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