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Finance: Trading of Derivatives

Volume 716: debated on Tuesday 5 January 2010


Asked by

To ask Her Majesty's Government whether they have estimated the percentage of derivative traders in London who deal in (a) the hedging of risks generated by non-financial transactions, (b) the hedging of risks generated by financial transactions, and (c) speculation. [HL714]

In the UK, the overall aim in regulating derivative markets is to ensure a high degree of investor protection, that markets are fair and orderly, and that market abuse is prevented as far as possible and, where it occurs, is detected and dealt with appropriately. This is consistent for all users of the market.

In order to discharge the responsibility to deter and detect market abuse, the FSA and UK derivative exchanges focus on all large positions in commodity derivative markets, irrespective of whether they are held by financial or commercial participants, on an ongoing and real-time basis. Neither the FSA nor UK exchanges currently collect or make available aggregated position information by participant type.

Asked by

To ask Her Majesty's Government what is their estimate of the current value of the financial derivatives market in London on the basis of (a) notional principal, and (b) the amount at risk in the event of a major financial crisis. [HL715]

The Bank for International Settlements (BIS) provides an estimate for the size of the London and global derivatives markets. As at 2007, BIS estimates that London had 43 per cent of the global OTC derivatives market (compared to New York at 24 per cent) based on an overall size of c. $415 trillion. Whilst this is a high notional figure, it simply represents the value of the assets on which the contracts are based. The risk exposure, represented by actual cash flows, is considerably smaller.

Compression of trades has addressed much of this risk. The UK supports ongoing international efforts to further strengthen market infrastructures such as the establishment of trade repositories and encouraging greater use of central counterparties. These measures will help to monitor and measure systemic risk.

On 16 December, Government will publish a package of policy proposals, designed to mitigate the impact of a future investment bank failure. The document, entitled Establishing resolution arrangements for investment banks, sets out more than 30 proposals to ensure an investment firm can be wound down effectively, with limited impacts on clients and counterparties of the failed firm, and on financial markets. These proposals form part of Government's broader agenda of work to reduce the likelihood, and impact, of failure in systemic financial firms.

Asked by

To ask Her Majesty's Government what is their estimate of the net earnings of the London financial community from trading in financial derivatives; where the corresponding loss from London's earnings on derivatives is borne; and what are the tax revenues from those earnings. [HL716]

HMRC's systems do not allow tax receipts from derivatives to be identified separately from other sources of profit. Consequently, these systems do not provide a breakdown of the net earnings derived from trading in financial derivatives. However, the usual corporate, income and capital gains taxes that apply to businesses and individuals involved with financial instruments will all apply. As in any business enterprise, in the first instance the losses on derivative instruments are borne by the relevant business entity.