BIS sees new risks in derivatives: central-bank group urges closer global monitoring.

Central-Bank Group Urges Closer Global Monitoring

WASHINGTON -- The Bank for International Settlements has issued a report calling for greater international cooperation in monitoring the growing markets for financial derivatives.

The Switzerland-based coordinating body for industrial nations' central banks thus reinforces concerns, expressed by members, including Federal Reserve officials in the United States, about oversight of swaps, options, and other instruments.

Linkages Pointed Out

Regulators, bank managers, and traders must become aware of the linkages between market participants and how all might be affected if a participant cannot cover its payment obligations according to the Switzerland-based coordinating body for central banks.

The BIS study, "Recent Developments in International Interbank Relations," was done for the Group of 10 countries' central banks, and presented to them over the summer.

"Banks don't just deal with other banks, they deal with a number of counterparties," said Larry Promisel of the Federal Reserve Board, chairman of the group that prepared the report.

"We thought it was time to review the nature of these international relationships."

Major Points

Among the report's recommendations to minimize risks to the international financial system were:

* Greater coordination of accounting and reporting practices for off-balance-sheet instruments.

* Improved public disclosure of financial positions.

* Greater cooperation to resolve legal uncertainties across borders.

* Stronger contingency planning for cases of market instability.

* Enhanced netting systems to limit payment risks.

* Improved statistics about nontraditional markets.

Linkages by banks across borders, as well as between bankers and nonfinancial firms, have grown significantly in recent years, the report said.

Between 1983 and 1991, international interbank claims within the BIS reporting area grew at a compound annual average of 13.6% at current exchange rates, to $4.7 trillion at yearend 1991.

"Banks have accounted for a large share of that growth, in part in their role as suppliers of derivative products to their clients, but increasingly through transactions on their own behalf for risk management and position-taking purposes," the report said.

At least 50% of banks' exposures in these markets are attributable to other banks, they found.

Risk Control Urged

Recently, many banks have reduced the size and shortened the maturities of their interbank exposures, the study said. And because the business is potentially risky, highly specialized, and technology-intensive, the derivatives business has become concentrated in a relatively small number of healthy institutions.

"There's a lot of benefit derived from the use of derivatives, but they are complex and it's important the we know what they're doing," Mr. Promisel said. Market participants have focused on managing these risks, he said, but more must be done.

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