Watchdog claims derivatives reform will boost the recovery

Tim Wallace
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CENTRALLY clearing derivatives will cut the chance of financial crises and boost the economy, a taskforce set up by the Bank of International Settlements (BIS) said yesterday.

Plans to increase banks’ capital requirements against uncollateralised derivative exposures will increase the cost of derivatives for customers, knocking 0.04 per cent from growth, the macroeconomic assessment group on derivatives calculated.

But the increased ability to net off exposures will cut the risk of crises, adding 0.16 per cent to growth.

“Counterparty exposures related to derivatives traded bilaterally in OTC markets helped propagate and amplify the global financial crisis,” said the report. “Many of these exposures were not collateralised, so OTC derivatives users recorded losses as counterparty defaults became more likely or, as in the case of Lehman Brothers, were realised.”