Reform of bank regulatory standards pushed

Panglao, Bohol – Bangko Sentral ng Pilipinas (BSP), together with other major central banks in Asia, has pressed the need for reform on the international bank regulatory standards, highlighting the challenges of some national financial authorities to implement global reforms to over-the-counter (OTC) derivatives markets.

The Bangko Sentral ng Pilipinas (BSP) recently hosted the eighth meeting of the Financial Stability Board (FSB) Regional Consultative Group.

FSB, an international body that monitors and makes recommendations about the global financial system, is a panel made up of central bankers, finance officials and top regulators from the world’s largest economies.

During the meeting held in Bohol, it was discussed that the BSP, as well as the other national financial authorities across Asia, is finding it hard to catch up with the implementation of certain international bank regulatory standards which are also being applied to other major markets in the world like the United States and Europe.

Implementation of global reforms to OTC derivatives markets was the subject of attention by the members of the FSB Regional Consultative Group for Asia (FSBA).

Co-chaired by Japan Financial Services Agency vice minister for international affairs Masamichi Kono Kono and  BSP Governor Amando M. Tetangco Jr., FSBA’s membership  includes financial authorities from Australia, Cambodia, China, Hong Kong SAR, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan, Philippines, Singapore, Sri Lanka, Thailand and Vietnam.

Merely a contract between two or more parties, derivative is a financial instrument generally used as an instrument to hedge risk.

OTC derivatives, on the other hand, is one distinct type of derivative that is traded and negotiated between two parties without going through an exchange or other intermediaries. The OTC market is composed of banks and other market participants, like hedge funds, and because there is no central exchange, traders are exposed to more counterparty risk.

BSP Governor Tetangco Jr. said in a briefing on Wednesday evening that the reason the topic was focused on this matter because many jurisdictions in Asia, including the Philippines, find it difficult to comply with the current content of the global reforms on OTC derivatives set by the FSB.

“On the global reform of OTC derivatives, we undoubtedly subscribe our full support and intention in improving our transparency to be able to better monitor the risk and linkages with OTC derivatives but the structure component of the reform agenda makes it difficult for us to meet the prescribed minimum standard at this time,” he added.

Discussions on OTC derivatives were centered on the impact on Asia of the reforms’ implementation in the US and Europe, cross-border implementation issues more generally, and the market infrastructure supporting derivatives markets in Asia.

Japan Financial Services Agency vice minister for international affairs Masamichi Kono, who is also present in the briefing, said there’s a need to consider individual national circumstances in the implementation of agreed international reforms while still maintaining consistency of outcomes and ensuring that the objectives of the reforms are achieved.

“Appropriate application of proportionality and sequencing of the reforms’ implementation will be useful,” Tetango added.

Members also highlighted the need for technical assistance with implementation of the reforms.

Given the current interest rate environment and taking into account the specific features in Asian banks and Asian markets, FSBA members also talked about how to effectively monitor and control interest rate risk in the banking book of Asian banks.

The next topic addressed by members was that of long-term investment (LTI) in Asia, particularly the potential impact on investment arising from financial regulatory reforms and other factors.