Regulatory reaction

Several regulators in the region are putting on hold derivatives deregulation, with some even banning the trading of certain contracts. Their reasons for doing so range from problems in the structured credit markets, to high volatility in foreign exchange rates, interest rates and equity prices, to rising food costs and inflation, to accusations of mis-selling of complex derivatives instruments.

China has yet again postponed the launch of exchange-traded financial futures - despite senior regulators expecting to give the go-ahead before the end of last year. The delay is reputedly due to concerns about the erratic movement in prices in underlying Chinese equities.

Meanwhile, India's Forward Markets Commission imposed a four-month ban in May on the trading of chickpea, refined soybean oil, potato and rubber futures. This followed an indefinite ban on wheat, rice, tur and urad (types of lentils) futures at the start of the year.

And the Reserve Bank of India (RBI) seems to have put the brakes on the creation of a credit derivatives market. This represents a reversal of the central bank's more positive approach in 2007, when it surprised the market (see India Risk, July 2007, page 8) by appearing to endorse the development of such a market.

That's a pity. With India's banks looking to implement the Basel II advanced approaches, the lack of an onshore credit default swap market will limit the benefit banks will reap from their hard work to upgrade their risk management practices.

That said, financial institutions themselves need to come up with methods of better self-regulation if they are to prevent the imposition of heavy-handed rules. A move in the right direction is the release of Structured Products: Principles for Managing the Distributor-Individual Investor Relationship on May 12 by the Joint Associations Committee of five trade bodies.

So too is the effort by major banks, data providers, brokers and exchanges to set up central clearing for credit derivatives via the Clearing Corporation (CCorp) in Chicago. But the the service looks set to suffer delays and may only cover the most liquid contracts. And it's still unclear how rating agencies - scrambling to revise their structured credit methodologies (see pages 44-47) - would convince the market a credit clearer should deserve a AAA rating.

Regulators should only introduce draconian rules as a last resort. But they should also push dealers hard in the right direction.

- Christopher Jeffery.