Global regulators toughen up trading risk rules | Reuters

Global regulators toughen up trading risk rules | Reuters

(Reuters) - Global regulators published new rules on Thursday to make the world's financial plumbing safer, but trading in stocks, bonds and derivatives will likely become more expensive.

World leaders want more financial transactions cleared and settled so there is an electronic audit trail showing who is exposed when anything goes wrong, as it did with the crash of U.S. bank Lehman Brothers in 2008.

Clearing houses will have to increase their default funds by asking for bigger margins and collateral from banks and brokers whose transactions they process on behalf of investors.

"There will be a need for a lot more capital in the system, probably billions of dollars," said Daniela Russo, director general of payment systems and market infrastructure at the European Central Bank.

The cost of extra collateral and margins is likely to be passed on to end investors but Russo said a safer, less risky financial system won't be free of charge.

Clearing in derivatives will become mandatory in many cases, which is already sparking competition in Europe and the United States where most trading in them takes place.

Regulators want to make sure that clearing houses taking on this extra business are resilient.

"With these new principles we believe we have produced a blueprint for the safety and stability of global financial infrastructure that will stand the test of time," said Hans Hoogervorst, who chairs the technical committee of the International Organization of Securities Commissions.

IOSCO, which groups over 100 watchdogs like the U.S. Securities and Exchange Commission, authored the draft rules with the Committee on Payment and Settlement Systems, which comprises central bankers from across the world.

Clearing is where trades are squared before settlement, the legal exchange of cash for ownership and safekeeping.

The 24 principles are out for public consultation and will come into effect by the end of 2012.

LEHMAN LESSON

The measures will apply to clearing houses like DTCC, Eurex Clearing, LCH.Clearnet and Cassa, and settlement houses like Euroclear and Clearstream.

They will have to hold enough collateral to cover their current credit exposures, potential future exposures and, for clearing houses in particular, enough financial resources to meet a wide range of stress testing scenarios.

Clearers would also be required to hold more liquidity or easily accessible cash-like funds so that if they get into trouble, they can operate long enough to close out trades.

The Lehman crash alarmed regulators because not all investors were able to retrieve their assets from the bank easily.

A substantially new principle recommends that clearing houses should have segregation and portability arrangements that protect customer positions and collateral.

The regulators also set out principles on how clearing houses can link up with each other, known as "interoperability."

Links between clearing houses are an "important source of additional operational and financial risks, which call for more stringent requirements."

Some regulators fear a domino effect rippling across the financial system if one derivatives clearing house goes bust, but banks who trade derivatives and shares say interoperability leads to competition and cheaper tariffs.

The new rules also help banks in countries where there is not enough derivatives trading to make a local clearing house viable and so they have to use a foreign clearer.

Financial market infrastructure "should establish fair and open access to its services, for both direct and indirect participants, with any restrictions justifiable only in terms of specific issues impacting safety and efficiency," the regulators said.

(Reporting by Huw Jones; Editing by Gary Hill)