TORONTO --International banking regulators are progressing faster than expected on developing guidelines to curb the risks associated with swaps and other derivatives.
A draft of the guidelines could be ready by October, several months sooner than expected, said Brian Quinn, a senior regulator with the Bank of England.
Mr. Quinn, interviewed during a banking conference here, said that a committee of international regulators had not yet fixed the amount of capital that would have to be set aside to protect against swings in interest rates and foreign exchange values.
Higher Ratios Held Unlikely
However, he said he was "reasonably optimistic" that minimum capital ratios would not be increased. Rather, he said, the risk from derivatives would likely be factored into existing capital requirements.
Referring to the panel of regulators working under the auspices of the Basel-based Bank for International Settlements, Mr. Quinn said: "It's something of a triumph that they have made as much progress as they have."
The risk associated with booming derivatives transactions has become one of the hottest topics among regulators. Earlier this year, E. Gerald Corrigan, the president of the Federal Reserve Bank of New York, warned bankers that they were incurring more exposure than they realized.
Management of Risk
Derivatives products - including swaps, options, and futures - help corporations manage their exposure to changes in interest rates and foreign exchange values. Banks arrange the transactions on behalf of clients and actively trade the instruments.
But while derivatives have provided lucrative fees, they are highly complex and pose hard-to-gauge risks to the institutions that arrange them.
Under regulations adopted by the Bank for International Settlements in 1988, banks must hold capital against derivatives. These off-balance sheet assets are converted to an on-balance-sheet equivalent, and capital is computed to reflect credit risk.
But credit risk is just one factor in evaluating the likelihood of loss. "I can lose money because you don't pay me back," said a Federal Reserve Board official, speaking on background. "But I can also lose money because the value of the claim between us goes down, or because I'm lending at a fixed rate but funding myself at a rate that isn't fixed."
Pace Has Picked Up
Banking regulators from 12 nations have been working for the past four years to refine the capital rules to reflect market risk, but progress has been extremely slow. Now, according to Mr. Quinn, the pace has picked up considerably.
The draft guidelines due out this fall are subject to approval by the 11 governors of the Bank for International Settlements and by national banking regulators.
Senior regulators at the conference here said the guidelines could be adopted as soon as next May.
In addition to examining the market trading risks of banks, international regulators are also seeking to draft guidelines for the treatment of large exposures such as underwriting or block trading, minimum initial capital for investment firms, supervision of financial conglomerates, and the treatment of foreign exchange risks.