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The plodding pace of global financial reform

France's then-Minister of Economy Christine Lagarde, right, and colleagues at work during a session of G20 finance ministers and central bank governors in Washington in April, 2011.


I'm going to let you in on a secret: the financial press hates – let me repeat, hates – writing about regulation. Why? Simple: it's really hard.

The rules and the reports on the rules are written in a language that's barely understood by the practitioners. Progress often is incremental, making "news" a rarity. The occasional dustup between banker and regulator notwithstanding, it's also difficult to generate tension – the base ingredient of almost every news story – because the bland and stoic public servants who write the rules tend to leave their disagreements behind closed doors.

Dozens of reporters will descend on Mexico City this weekend for the final meeting of Group of 20 finance ministers this year. Prediction: there will be lots of headlines about "currency wars" and plenty of ephemera about Europe's existential crisis and the U.S.'s fiscal cliff. There will be far fewer pixels used to describe the state of the G20's financial regulatory agenda, which would be too bad because things don't appear to be going so well.

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Earlier this week, the Basel Committee reported that only about a quarter of its 27 members have met their Basel III obligations. And now we learn from the Financial Stability Board that the G20 could miss its deadline of the end of 2012 to have in place a system to run most derivatives through central clearing parties.

Perhaps the biggest reason credit markets froze during the financial crisis was the fact that trillions of dollars of derivatives contracts were being sold in the dark in private, or "over the counter," trades between two parties. When investors lost confidence in those assets, the global financial system seized because no one knew who was exposed to all that worthless paper.

Since 2009, the G20 has been trying to ensure that never happens again. The idea is to force most derivatives through a central clearing party, which guarantees each side of a transaction gets paid, and to ensure all the trades are recorded in a repository of some kind.

That part of the project is going well. The Financial Stability Board said Wednesday in a progress report that the "infrastructure" is ready to go. So, too, are the domestic authorities. Bank of Canada Mark Carney, who leads the stability board, told the House Finance Committee Tuesday that "all G20 countries" have decided on the "direction at which they are going to proceed with central clearing."

The problem, as always, is international co-ordination. Derivatives markets are global; regulators are local. That means domestic authorities must co-ordinate their rules and approaches in order for the system to work efficiently. Clearing houses are delaying expanding the types of derivatives they accept until the regulatory environment is set.

"Progress to date in cross-border discussions has been slow," the FSB report says. "This risks delaying the full and timely implementation of the G20 objectives."

In Mexico, Mr. Carney and Finance Minister Jim Flaherty at least will be able to apply some moral authority to the debate. Earlier this month, Canadian regulators, including the Bank of Canada, cleared the way for Canadian banks to use international clearing companies, opting against setting up a domestic system that would have cost a lot of money and probably would have delayed progress toward truly global system.

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Surely Messrs. Carney and Flaherty will be pushing their counterparts to meet the G20 deadline. Both have sought to present Canada as a leader in the effort to overhaul global financial rules. In this space, at least, we intend to document their progress.

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