Global Financial Regulatory Reforms and Sovereigns’ Exemption

Purpose: The aim of the paper is to underline the (hidden) risks posed after the crisis by the exemption of non-financial operators, especially sovereigns, from the regulatory reforms of OTC derivatives undertaken by G20 countries in the absence of accounting data on trading.Design/Methodology/Approach: Recent financial regulatory improvements are reported to underline that the trading of OTC derivatives by sovereigns and local administrations does not take place under the new regulatory umbrella, either because of the relative size of the institution, the lack of incentives to adhere to Centralized Counterparty Systems, and most of all the absence of proper accounting rules. Sovereigns and local administrations have the potential to undermine global financial stability. Findings: The limited availability of accounting data on derivatives' use by public administrations constitutes a barrier towards a full comprehension of risks involved. Sovereigns should be compelled to adhere to the Centralised Counter Party System and the collateralized system of trading; short-term costs of adhering to CCPs are worth $20 billion.Research Implications: The new regulatory system failed to explicitly consider the trading of sovereigns and this can reduce the effectiveness of regulation itself and can have negative impact on financial stability; in fact, omitting sovereigns from these regulations represent a significant risk oversight because they are systemically important players, although with a special political power.Originality/Value: Despite progress made in improving the transparency and resilience of OTC derivative markets after the subprime crisis, sovereigns and public administrations are exempted from the new regulation, posing severe risks to financial stability