OTC deadline confirmed by G20, as Tobin threat recedes

Progress on four initiatives aimed at reshaping the global financial markets was mixed at last weekend’s Group of 20 (G20) summit in Cannes, held under the French presidency of the group of leading economic powers.
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Progress on four initiatives aimed at reshaping the global financial markets was mixed at last weekend’s Group of 20 (G20) summit in Cannes, held under the French presidency of the group of leading economic powers.

Weak support for Tobin tax

A Europe-backed proposal for a financial transaction tax (FTT) failed to secure the backing of a quorum of G20 nations on the weekend.

British prime minister David Cameron was among the key opponents to the FTT as it is presently proposed, while US president Barack Obama was non-committal.

“If other countries want to introduce new financial taxes at home, including to raise revenue for development, that is for them to decide,” reported Cameron to parliament after the meeting. Cameron told the G20 the UK would only back an FTT if it was “implemented globally”.

Germany, while initially backing the idea, has reportedly cooled.

“We acknowledge the initiatives in some of our countries to tax the financial sector for various purposes, including a financial transaction tax, inter alia to support development,” a communiqué from the G20 stated after the summit.

In September, the European Commission proposed a Europe-wide tax to be levied on all transactions of financial instruments between financial institutions when at least one party was located in the European Union. The exchange of shares and bonds would be taxed at a rate of ten basis points (0.1%) and derivative contracts at a rate of one basis point (0.01%).

Last week, two US lawmakers introduced legislation to impose a three-basis-point (0.03%) FTT in the United States, raising the possibility of coordination between the US and Europe on the issue.

While French president Nicolas Sarkozy asserted on the necessity of an FTT – an insistence supported by the appearance of pro-FTT Microsoft founder Bill Gates at the G20 – western leaders were not quick to back the concept.

Derivatives measures reaffirmed

Reform of the over-the-counter (OTC) derivatives markets was reaffirmed as “crucial”. The G20 reiterated all standardised OTC derivatives contracts should be traded on exchanges or electronic trading platforms and centrally cleared by the end of 2012.

“We agree to cooperate further to avoid loopholes and overlapping regulations,” a spokesperson for the G20 said after the summit. “A coordination group is being established by the Financial Stability Board (FSB) to address some of these issues, complementing the existing OTC derivatives working group.

Enhanced FSB reveals SIFI list

The Basel, Switzerland-based, FSB was also given new powers as a watchdog for global banks deemed too big to fail. With greater financial autonomy endorsed by the G20 on Friday, from 2012 onwards the FSB will enforce tougher international standards on banks deemed systemically important financial institutions (SIFIs), including greater scrutiny of risk management procedures and higher capital requirements.

“G20 endorsement of the policy measures marks a major milestone,” said Mario Draghi, current chairman of the FSB. “Full and consistent implementation of these policies will lower the probability and impact of SIFI failure, and address moral hazard risks by enabling financial institutions at the core of the global system to be resolved without disrupting the real economy and imposing costs on taxpayers.”

Internationally, 29 banks have been identified as SIFIs, including ten euro-zone, eight American, four British and four Asian banks. While the FSB did not disclose which banks would be subject to which tier, new core capital requirement surcharges for SIFIs will start at 1% of risk-weighted assets, rising to 2.5% for the biggest banks under the regime.

The newly-released list of Sifis is: Dexia, Bank of China, Banque Populaire, BNP Paribas, Crédit Agricole, Société Générale, Commerzbank, Deutsche Bank, Unicredit, Mitsubishi, Mizuho, Sumitomo Mitsui, ING, Santander, Nordea, Credit Suisse, UBS, Barclays, HSBC, Lloyds, Royal Bank of Scotland, Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley, State Street and Wells Fargo.

To oversee the organisation, Mark Carney, governor of the Bank of Canada, succeeds Draghi – who recent replaced Jean-Claude Trichet as head of the European Central Bank – as chairman for a minimum three-year appointment.

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