FSA blasts the banks over derivatives

THE Financial Services Authority today lambasted the City's banks for failing to keep their paperwork up to speed in the fast-growing, multi-trillion-dollar market for credit derivatives.

In an open letter to financial firms involved in the market, the FSA's head of capital markets, Gay Huey Evans, said the watchdog was concerned about the high levels of unsigned confirmations outstanding between counterparties for over-the-counter credit derivatives.

This, she said, raised 'serious concerns for market efficiency and market confidence'. She called on banks to improve their back-office procedures.

The warning will fuel fears about the dangers to the financial markets in what has become a runaway market for credit derivatives - a way for traders and investors to hedge against or speculate on credit risk.

Legendary billionaire investor Warren Buffett famously described derivatives as 'financial weapons of mass destruction'.

Huey Evans accepted that the credit derivatives market helped as a tool to diversify risk but warned: 'If simple operational procedures are unable to keep up with the pace of market development, the risk that misunderstandings and uncertainty will negatively impact market confidence increases.'

The credit derivatives market rose 44% in the first half of 2004 to $5.4 trillion (£2.8 trillion), according to the International Swaps and Derivatives Market.