G-20 backs derivatives reform

The Group of 20, which contains the world's leading developed and emerging economies, backed derivatives reform proposals in a summit hosted by US president George Bush in Washington, DC on Saturday, November 15.

The official communiqué issued on Saturday cited "weak underwriting standards, unsound risk management practices, and increasingly complex and opaque financial products" as the principal reasons for the financial crisis.

The summit promised to address these problems through multilateral efforts, while remaining faithful to "free market principles". The attending nations also agreed to refrain from erecting trade barriers for the next year.

On November 14, Christopher Cox, chairman of the US Securities and Exchange Commission (SEC), said that "the virtually unregulated over-the-counter market in credit default swaps (CDS) has played a significant role in the credit crisis". The G-20 agreed, identifying the need to strengthen "the resilience and transparency of credit derivatives markets and [reduce] their systemic risks". The summit also endorsed the launch of central counterparty services, or clearing houses, which should provide greater transparency for OTC derivatives transactions.

Regulators were also encouraged to verify that infrastructure for OTC derivatives can sustain the increasing volumes, and ensure market participants use exchange-traded or electronic trading platforms for CDS contracts.

The summit also said that capital requirements for banks' structured credit and securitisation activities should be increased, and called for a review of remuneration to avoid encouraging risk-taking.

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