February 10, 2009 / 4:32 PM / 10 years ago

FACTBOX - Global financial regulation reform in focus at G7

(Reuters) - The Group of Seven countries meet in Rome on Friday, with attempts to move forward with regulatory reform agreed by the wider G20 in Washington last November high on the agenda.

Diplomats say the promise last year by global leaders of “rapid action” on tightening rules and oversight of financial markets has taken a backseat as governments focus on their uphill battle to combat growing recession.

The mechanics of global reform, let alone its substance, have yet to be agreed on and some changes will be hugely complex, while what new U.S. President Barack Obama wants at the global level is still hazy.

But the G7 is the first of a series of top level gatherings to prepare the ground for a G20 summit in London on April 2, and officials hope that the meetings can make progress and begin to deliver on the ideas agreed last year.

The principles agreed by the G20 last year for implementation are outlined below.

FINANCIAL STABILITY FORUM

Diplomats say the core scenario remains that the Financial Stability Forum, a body of central bankers, regulators and finance ministers, would propose new global standards such as on bank capital rules or regulating off exchange markets.

The International Monetary Fund would use its authority to ensure the standards are implemented at country level.

Which new countries will joint the FSF is unclear as including all G20 countries would be too unwieldy.

South Korea hopes it will be among those allowed to join the expanded FSF, and is awaiting news as early as the end of this week at the G7, Choongsoo Kim, South Korea’s ambassador to the OECD told Reuters.

BANK SUPERVISION

“Supervisors should collaborate to establish supervisory colleges for all major cross-border financial institutions.”

Not much progress so far. Diplomats say vested national interests are hampering efforts to set up colleges inside the European Union as well as globally. The G7 meeting is not expected to make a breakthrough on this issue.

CAPITAL REQUIREMENTS

“Standard setters should set out strengthened capital requirements for banks’ structured credit and securitization activities.”

The EU has proposed tough rules on securitisation that would force banks to retain a slice of the products they sell in a bid to encourage higher underwriting standards. The United States has some concerns about how they would affect U.S. banks.

The Basel Committee of banking supervisors also working on reforming capital requirements standards.

CREDIT RATING AGENCIES

“We will exercise strong oversight over credit rating agencies”

The United States introduced voluntary registration before the credit crunch came to a head. The EU is adopting a law that will make registration mandatory along with direct supervision and inspections.

Washington has accused the EU of going too far and impinging on the operation of U.S. companies as two of the world’s top three agencies are based in the United States.

EXECUTIVE PAY

“Reviewing compensation practices as they relate to incentives for risk taking and innovation”

No coordinated global approach yet.

President Barack Obama has set a $500,000 annual cap on pay for top executives at companies receiving taxpayer funds.

The European Commission will present “appropriate legislative measures” in March that will set out a common EU approach for member states to apply. Britain, France and Germany have already taken their own initiatives.

CREDIT DERIVATIVES MARKETS

“Strengthening the resilience and transparency of credit derivatives markets and reducing their systemic risks, including by improving the infrastructure of over-the-counter markets”

The EU is adopting a reform that may give preferential capital requirements treatment to banks that centrally clear credit derivatives they trade off an exchange.

A U.S. congressional committee has tabled a draft law that would make central clearing of credit derivatives mandatory.

The EU and United States insist that clearing operations are set up on their own turf but banks say they just want one global solution.

ACCOUNTING

“Reviewing and aligning global accounting standards, particularly for complex securities in times of stress”

Fair-value accounting rules relating to complex securities have already been eased in the EU and the United States. There is pressure for further changes.

An anticipated reform of supervision in the United States has also slowed U.S. convergence of its accounting rules with those used in the EU.

PROCYCLICALITY

“Mitigating against pro-cyclicality in regulatory policy”

Policymakers want changes to “pro-cyclical” regulation seen to be exacerbating credit crunch fallout.

Apart from some accounting rule tweaks, little progress so far. The European Commission has yet to complete its “relection” on the subject.

Reporting by Huw Jones, editing by Patrick Graham

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