View from City Road: A welcome note of calm on derivatives

The tail has been wagging the dog again. The market makers may justify this week's nervy swings in equities by fears about higher interest rates et al, but actual trading has been painfully thin. Rather the share price gyrations of the past 48 hours have been primarily driven by activity - at least some of it presumably speculative - in the derivatives markets.

That will not have gone unnoticed in Switzerland, where regulators at the Bank for International Settlements are struggling to find ways to control the burgeoning dollars 18,000bn-a- year derivatives industry.

BIS's members are fretting as much about the potential influence derivative instruments might have on monetary policy - especially by mitigating the effects of interest-rate shifts - as the risk that unexpected losses could prompt a financial collapse.

Nevertheless, in its first public comments on the issue since a strident report last month from the US Congress calling misguidedly for draconian controls, the BIS has sounded a welcome note of calm.

Andrew Crockett, the BIS's general manager, yesterday placed the emphasis on the need for transparency and increased disclosure rather than on highly prescriptive rules, which would probably merely drive derivatives offshore.

The derivatives markets are notoriously short on information and long on rumour, making it difficult for players to make a sensible assessment of the risks of dealing with any particular counterparty. Mr Crockett is right; more light, not more heat, is what is needed.