Derivatives standards held up by bank row: Committee chairman attacks industry on disclosure

NEW international capital standards to make derivatives trading safer have been held up by a row over whether banks or their supervisors should be responsible for assessing the risks involved.

Tommaso Padoa-Schioppa, chairman of the Basle Committee of Banking Supervisors, said yesterday that as a result he could not say when the new standards would be ready.

Large international banks have objected to a formula put forward by the committee for calculating the amount of capital to be set aside to back derivatives trading.

They claim that the committee's system is not accurate or flexible enough. They want to be allowed to do the calculations of how much capital they need themselves, using their own internal risk-management systems instead of the committee's formula.

Derivatives are contracts based on futures and options, and they allow investors to take large risks on the back of small up-front investments. The supervisors want derivatives trading to be made safer by forcing banks to set aside capital to cover the risk of losses from market fluctuations.

Mr Padoa-Schioppa, who is also deputy director general of the Bank of Italy, speaking to a meeting of the International Monetary Conference in London, said large international derivatives dealers had accepted the thrust of the committee's proposals last December. They accepted that they could 'churn out the capital calculation' using the committee's framework. But it would be hard to integrate this into their daily risk-management and control systems.

Mr Padoa-Schioppa said it was too early to say whether bank supervisors could convince themselves that the use of the banks' own calculations was an acceptable way to meet supervisory requirements. He reminded his audience that these were driven 'by the public interest, not by risk-return considerations.'

He also attacked the derivatives industry for what he called 'market failure' in its lack of disclosure. The market failure was that no one wanted to be first to disclose information for fear of giving away a competitive advantage. But if they were all forced to give the information, they would be happy to do so because there would be no disadvantage to individual firms.

Sir Dennis Weatherstone, president of the IMC and chairman of JP Morgan, made a plea for customers and bankers to understand derivatives better. He said 'perhaps if we think of money as the original derivative we can turn the focus where it truly belongs, to management. This has to involve real understanding by both banker and customer.'

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