Basle cuts cost of derivatives trading

THE COST for banks of dealing in derivatives will be slashed by up to 40 per cent as a result of new rules released yesterday by the Basle committee on banking supervision.

A document published by the committee, which sets the framework for banking supervision in industrial countries, includes a formula that cuts the amount of capital banks have to set aside to back their derivatives exposure.

At present banks have to set aside capital to match their total derivatives exposure to all the other banks they deal with. The new formula allows banks to net their exposure to each counter- party, so the capital required will be based on the difference between what banks owe each other.

Bankers say this could reduce capital requirements for derivatives business by between 25 and 40 per cent on typical portfolios. With less capital required, the cost to banks of holding derivatives falls. This is likely to encourage derivatives dealing.

British banks will not be able to take advantage of the new netting proposals until the European Union's solvency ratio directive, which will incorporate it, has been passed by the European parliament. This may not be until next year. The committee is allowing until October for comment.

The Basle committee also changed its rules to cope with the enlargement of the OECD - the club of industrial countries - to include Mexico and others.