A key benefit of the Basel Committee’s proposal to strengthen capital requirements for counterparty credit risk (CCR) is that it will also provide a powerful mechanism to induce banks active in over-the-counter derivatives markets to clear as many deals as possible through central counterparties. It has become a major policy objective among regulators in both the EU and US to ensure as high a proportion as possible of over-the-counter (OTC) derivatives transactions become standardised, cleared through multilateral arrangements and traded on exchanges. Incentives for financial firms using central counterparties are being considered on both sides of the Atlantic, while firms undertaking customised, bilaterally cleared transactions are threatened with higher capital charges.

A tsunami wave of new regulation is heading towards the financial sector in the wake of the global crisis, one top international regulator has famously said, and 2010 is the year when the wave starts hitting the shore. Below is a diary of the implementation dates, events, meetings, deadlines and timelines that will mark the progress of the racing wave. For many of the key regulatory developments there is no precise date, only an aspirational one such as “by the middle of the year” or “by the end of 2010”.

TOKYO – Japan’s Financial Services Agency is beginning a public consultation on a range of new financial regulations that it is considering submitting to the parliament – the Diet – early in 2010. The areas where action is being considered were set out in a paper* issued for comment in mid-December. They include: regulation of over-the-counter (OTC) derivative transactions; regulation of hedge funds; strengthening of securities clearing and settlements systems; investor protection; consolidated regulation for securities firms; and reporting of ‘short selling.’

LONDON – Amid the furore over bankers’ 2010 bonuses, the Bank of England is telling banks that they should not only take advantage of current favourable market conditions to raise new capital, but also conserve capital by reducing staff costs and cutting dividends. While it is not yet clear by how much base capital might need to increase as a consequence of all the new regulatory requirements now in the pipeline, it is likely to be “significant,” the Bank warns in its latest Financial Stability Report, published in mid-December.

BASEL – Insurance supervisors will continue to exercise “macroprudential surveillance” of the global reinsurance market, although the industry has shown a robustness and resilience that’s contributed to the overall stability of insurance markets.

BASEL – Central bankers and top supervisors from the 27 most important economic countries remain determined to drive forward the reform agenda for the banking industry as rapidly as possible. At their early-January meeting in Basel they piled pressure on the Basel Committee, which sets prudential standards for banks around the world, setting out fresh areas for evaluation and possible action; and re-emphasising the tough deadlines for reform proposals already in the pipeline.

LONDON – British regulators are signalling significant differences with mainstream thinking, notably in the US and EU, over how to reduce systemic risk in the vast over-the-counter (OTC) derivative markets. There are currently initiatives on both sides of the Atlantic to force greater standardisation of OTC transactions, and to require these standardised contracts to be cleared through central counterparties and traded on exchanges or other trading platforms.

NEW YORK – The strongest predictor of bank distress ahead of the 2007-09 global financial crisis was the ratio of tangible common equity to risk-weighted assets. But for all major banks to now raise this ratio above 10% – where the risk of distress is virtually zero – would cost a total $1.45 trillion and reduce the return on equity by 560 basis points.

MANAMA – Regulators need to consider whether the use of off-balance sheet special purpose vehicles in Islamic finance gives rise to the same lack of transparency that occurred with off-balance sheet structured investment vehicles (SIVs) in conventional finance, a leading Middle East central banker said in mid-December.

BASEL – Central bankers are telling commercial banks they must do everything to reinforce their balance sheets by all appropriate means, Europe’s top central banker said after talks on the global economy held by the Bank for International Settlements (BIS) in January.