Global deal in sight to prevent re-run of post-Lehman chaos
By Huw Jones
LONDON (Reuters) - The $700 trillion (434.16 trillion pounds) financial derivatives industry will make a fundamental change to its contracts this year to help regulators wind down failed banks without destabilising markets, the world's main derivatives body said on Tuesday.
Global financial watchdogs want to be able to put a temporary halt on market participants trying to "close out" derivatives contracts if a bank runs into trouble.
When Lehman Brothers collapsed in Sept. 2008 there was a rush to close derivatives contracts on the bank's books, which caused chaos in the financial markets.
Under the new contract terms, default clauses in derivatives contracts such as interest rate or credit default swaps would be temporarily suspended, such as for up to 48 hours.
The Financial Stability Board (FSB), a regulatory task force for the Group of 20 economies (G20), is spearheading this process. G20 finance ministers and central bank chiefs will meet in Australia next week to discuss progress.
A G20 summit in November is expected to endorse the deal on derivatives, seen as a key component to ending "too big to fail" banks so that regulators can allow big banks to collapse rather than propping them up with taxpayer money.
The International Swaps and Derivatives Association (ISDA), the body leading the negotiations with regulators on behalf of the industry, said a contractual solution for a temporary stay on derivatives "close outs" was progressing well.
"We expect the large systemically important banks to adopt the stay within new and existing contracts via a protocol this year," an ISDA spokesman said.
The protocol should be finalised within the next few weeks.
"We also expect that regulators will impose new regulations in their jurisdictions that will enable buy-side firms and other participants to follow later in 2015," the spokesman added.
But asset managers have been wary of making the change to derivatives contracts, saying they have a legal duty to their clients not to delay getting their money back.
(Reporting by Huw Jones. Editing by Jane Merriman)
