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Financial regulators are doing a great job, say financial regulators

By Edmund Heaphy

Derivatives rules created by financial regulators in the aftermath of the global financial crisis are doing a great job—according to financial regulators.

The Financial Stability Board, the international umbrella group of regulators in 25 jurisdictions, said today (Aug. 7) that the reforms—created to encourage derivatives buyers to run transactions through clearing houses—were “achieving their intended goals.” For the most part, they’re right: The rate at which the most common types of derivatives move through clearing houses has increased markedly since 2009. Clearing houses reduce risk, primarily by checking the financial strength of both parties in a trade.

In its “post-implementation evaluation” report (pdf), the board noted that the use of clearing houses is more common at large banks than at much smaller firms, which are more likely to face problems accessing clearing houses.

The report also points to the relatively small number of clearing houses. Just five firms account for more than 80% of the margins on over-the-counter (OTC) derivatives—the most common type—in the US, UK and Japan. This could “amplify the consequences” of a failure or withdrawal of one of these firms.