Closer Cooperation Sought Among Regulators to Block Future Derivatives Disasters

Futures market regulators, reeling from the shocking collapse of the British bank Barings PLC, are seeking more international cooperation among themselves as a way of preventing another such disaster from derivatives trading.

“Frankly, the Barings crisis underscores the vital need for globally effective mechanisms,” U.S. Commodity Futures Trading Commission Chairwoman Mary Schapiro told industry executives and regulators from around the world last week.

Schapiro, speaking at the Futures Industry Assn. annual conference here, said that the CFTC, along with the U.K. Securities and Investments Board, wants to convene a meeting of the world’s major futures market regulators to establish measures to protect markets and customers.

“Business is global and regulation is domestic and that is just a huge problem,” Andrew Winckler, head of supervision at the British regulatory agency, told the meeting.

Federal Reserve Board Governor Susan Phillips, speaking Friday, also urged regulators to strengthen global cooperation, adding that she does not believe new laws are needed.

“Markets are becoming global,” Phillips said. “A lot of what is going to have to happen is improved coordination around the world.”

Noting that there has been a tradition of coordinated regulation on the banking side and citing monthly meetings of central bankers, she said that “we need to make some progress among securities and banking regulators around the world.”

Central bankers meet once a month under the auspices of the Bank for International Settlements in Geneva.

Asked about the recent problems caused by upsets in both over-the-counter and exchange-listed derivatives, Phillips said, “I do think that when you have market volatility there are going to be losses that occur.”

But, she added, “In many ways the financial system has been quite resilient.” Phillips, asked if she were to testify before Congress on any proposed regulation for derivatives markets, said: “The Fed has testified we don’t believe more regulation is necessary. That’s not to say nothing needs to be done.”

One proposal that emerged during the meeting would be to promote national bankruptcy laws that forestall liquidity crises, so that margins and positions of solvent customers in insolvent firms would not be frozen.

Thus the group would look at bankruptcy laws in major market centers to see if those laws segregate customer funds.

Regulators warn, however, that any changes in this area could take a long time.

“When you are talking about amending bankruptcy laws, or doing anything that requires that regulators go to their parliaments or congresses or whatever . . . you are looking at a longer-term process,” Schapiro told a news briefing.

The regulators would also aim to improve mechanisms used to detect big positions held in multiple markets, which could threaten overall market stability, she said.

Schapiro said the CFTC would work with the Singapore International Monetary Exchange, where much of Barings’ losses occurred in Nikkei 225 index futures, as well as with the Chicago Mercantile Exchange, which has a mutual offset agreement with SIMEX, and other exchanges to ensure that market linkages do not diminish existing safeguards.

A representative of a German regulatory authority said he believed Germany already has made some progress in the area of protecting customer funds following a financial crisis at Metallgesellschaft AG, triggered by trading in energy derivatives.

For example, he said, the Bundesbank is working on a directive aimed at clarifying separation of customer funds held by banks.