Bloomberg News

Derivative Risk to Financial System Seen Easing in ISDA Survey

April 08, 2014

The threat posed to financial markets by derivatives has been curbed by regulators even as costs for investors have increased, according to an industry survey.

More than 57 percent of those questioned by the International Swaps & Derivatives Association said the system is on a sounder footing than it was before the financial crisis. That improvement has brought with it more red tape, as well as greater expense, according to respondents, of which 42 percent were non-financial corporates, almost 30 percent were banks and 20 percent asset managers.

Regulators sought to rein in the systemic danger of derivatives (JPM:US) after the 2008 collapse of Lehman Brothers Holdings Inc. exposed how they linked the world’s biggest financial institutions so that a failure by one threatened to pull down the rest. Reporting transactions to data repositories and exchanging contracts through central clearinghouses has been introduced to prevent a repeat and to ensure supervisors can trace connections.

The most important factor in boosting the safety of the financial system is tighter management of credit risk, according to more than 85 percent of respondents. That’s followed by capital requirements and then reduced leverage.

While the new landscape is safer, it’s also more expensive and administrative burdens have increased, according to 81 percent of respondents.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net Michael Shanahan


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