very little evidence to suggest that these contributed in any significant way to the crisis

TO BE NOTED: From the FT:

Warning over UK derivatives backlash

By Jeremy Grant in London

Published: April 26 2009 22:45 | Last updated: April 26 2009 22:45

London’s status as a leading financial centre risks being damaged if policymakers regulate over-the-counter derivatives without distinguishing between products that contributed to the financial crisis and those that did not, a report commissioned by the City of London Corporation says Monday.

The report, prepared by consultancy Bourse Consult, will urge regulators not to “throw the baby out with the bathwater” amid recent calls for OTC – or privately negotiated – derivatives markets to be subjected to greater clearing and regulatory scrutiny.

The warning is evidence of a nascent lobbying campaign by market participants against what they fear could be a regulatory backlash that inflicts collateral damage on London, which Bourse Consult says accounts for 43 per cent of the value of OTC derivatives traded.

This month’s Group of 20 nations summit pledged to “promote the standardisation and resilience of credit derivatives markets, in particular through the establishment of central clearing counterparties subject to effective regulation and supervision”.

The report rejects the assumption that derivatives in general are to blame for the current financial crisis, arguing that critics fail to distinguish between derivatives that functioned normally – such as foreign exchange and interest rate swaps – and collateralised debt obligations and other structured products.

“The credit derivatives, which were traded most heavily on the OTC derivatives markets, were CDS [credit default swaps]. There is very little evidence to suggest that these contributed in any significant way to the crisis,” the report said.

The push by regulators for such instruments to become more transparent had become “a highly politicised issue”.