25 January 2008

FT: Regulators may force banks into greater disclosure

Banks that produce complex and illiquid derivative products that have been at the heart of the credit squeeze may be forced to provide more information about them on public stock exchanges.

Leaders of NYSE Euronext, the US-European exchange group, said on Friday that global regulators were considering telling banks that they must disclose basic data about such contracts, many of which have fallen sharply in value in the wake of the US subprime housing crisis.

Duncan Niederauer, chief executive of NYSE Euronext, told a media briefing in Davos that the exchange had been approached by global regulators asking whether it and other stock exchanges could become clearing houses for information on over the counter contracts such as collateralised debt obligations and credit default swaps.

“There is a severe lack of transparency in some of these instruments. You cannot punch a screen and say: ‘What is the quote for this exotic piece of paper?’ I would think a natural first step might be to, say, turn us into a quoting and reporting facility,” said Mr Niederauer.

European securities regulators and the Securities and Exchange Commission in the US are reviewing the steps needed to prevent a recurrence of the credit crisis of the past few months. One of the biggest shocks was the rapid loss of confidence in complex instruments that were sold by banks to handfuls of investors.

Jean-François Théodore, NYSE Euronext deputy chief executive, said banks might initially be asked to provide some data about securities and disclose the price of transactions.

“They [regulators] want to oblige the person who creates the piece of paper to do a little more than absolutely nothing,” he said.

Even if regulators tell banks that they must disclose data on OTC contracts, they may prefer to do so through their own trade reporting platforms rather than public stock exchanges, with which they compete for equity trades.

An investment banking consortium in Europe recently created a trade reporting platform in Europe for OTC equity trades. The platform, known as Project Boat, has just been sold to the technology group Markit.

By John Gapper in Davos

© Financial Times