Investors warn on crisis plan for derivatives 

Institutional investors and pension funds have warned they may resist a plan by the world’s biggest banks to rewrite their derivatives contracts as part of reforms aimed at preventing a failing institution from destabilising global markets.

More than 90 per cent of the contracts in the $710tn off-exchange market are expected to be affected by new protocols agreed by the banks, which are set to be formally unveiled in coming days.

Eighteen of the biggest banks have agreed to give up their right to immediately close out their swaps contracts with a failing institution in order to to allow authorities more time to work out a resolution plan.

Regulators have been concerned by the fallout if a counterparty exercised its right to close out swaps in those crucial hours after a central bank intervention.

But institutional investors, who are on the other side of many derivative contracts, have warned they cannot voluntarily give up the right to cut off business with a failing bank because of a fiduciary duty to protect their investors’ interests just to help a single institution.

However, four bank negotiators said they believed the combined force of regulators and banks would make it impossible for institutional investors to resist the change.

Officials around the world are drawing up rules that would force banks’ counterparties to give up their ability to terminate derivatives contracts in the event of a default. They are aiming to pass them next year, according to people familiar with the process. “That is a key piece that needs to be done by regulation and each country using different regulation,” said one bank lawyer.

 

Source: FT- Investors warn on crisis plan for derivatives

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