Global reforms seen to favor rich countries

PANGLAO, Bohol—Emerging economies are seeking more flexibility in the implementation of recent global financial reforms, which may work well in the rich world but may stymie the development of capital markets elsewhere.
At the conclusion of the Financial Stability Board (FSB) regional consultations last week week, leaders of central banks and other regulatory agencies from emerging markets expressed concern over the disproportionate effects of the global reform movement.

In particular, policymakers said they were worried over the new rules governing so-called over-the-counter (OTC) derivatives, which are loosely supervised bilateral transactions—foreign exchange hedges, interest rate swaps and the like—between banks.

These transactions are vital in creating price benchmarks for certain types of investments, such as bonds and foreign exchange, which leads to the better functioning of financial markets. Reforms in the rules governing these transactions were deemed necessary, given the role derivatives played in triggering the 2008 global financial crisis.

“We observed that many jurisdictions will find it difficult to comply with current reforms,” Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said at a press conference Wednesday evening.

Tetangco co-chairs the FSB Regional Consultative Group for Asia (RCGA). The Switzerland-based multilateral regulatory body is currently chaired by the Bank of England’s Mark Carney, and all its members are advanced economies. Its main goal is to craft policies that will prevent a repeat of the 2008 financial crisis.

Despite its exclusive membership, FSB also has six consultative groups, the RCGA among them, which are made up of non-members but are able to voice their opinions to the main body.

The main focus of this year’s RCGA meeting was the OTC derivative rules now being pushed by FSB globally. Dealing with countries that fail to comply with these rules may lead to stiff penalties for banks in the form of higher risk weights on transactions, making them more expensive.

According to Tetangco, the current form of OTC reforms call for the establishment of electronic trading. Central clearing houses would also have to be created. Tetangco said putting up this sort of infrastructure in advanced economies would be easy, given the size and scope of their OTC markets.

For emerging markets like the Philippines, the case may not be so. OTC trading in the Philippines is still in its infancy, with just a handful of transactions being completed every day. The same goes for other small economies, where putting up clearing houses and electronic trading platforms may prove to be too expensive and nonviable.

“Members stressed the need to consider individual national circumstances in the implementation of agreed international reforms while still maintaining consistency of outcomes and ensuring that the objectives of the reforms are achieved,” RCGA said in a statement at the end of the meetings.

Tetangco said “FSB rules would make the market unattractive, and if there’s no trading, there’s no market.”

RCGA, he added, believed that FSB rules need more flexibility to account for emerging economies’ capabilities.

Tetangco said RCGA members would forward this view to the FSB’s main body when the latter meets in Frankfurt, Germany later this year.