MAS warns on derivatives

SINGAPORE – A senior official from the Monetary Authority of Singapore called for international cooperation among regulators to deal with the increased systemic threat posed by unconfirmed derivatives transactions and other processing glitches at a derivatives industry event. "The rapid growth experienced in derivatives has brought about a new landscape in risk management, both in terms of the level of risk, as evidenced by the phenomenal growth in volumes, as well as the sophistication of risk," said Teo Swee Lian, deputy managing director in the prudential supervision of MAS. "As instruments become more complex and volumes increase, the development of the infrastructure for managing and controlling risk must keep pace. The challenges we face includes not just how to measure and understand market risk, but also how to manage operational and legal risk."

"When this unravels, will it be in an orderly manner?" she asked. "The settlement backlog in the derivatives market is an example of a situation where the front office develops much more quickly than the back office. The complexity of the instruments is only one reason for the backlog, another reason is the volume and the new participants in the market."

Many participants in the conference – the International Swaps and Derivatives Association's annual meeting in mid-March – had noted that many