Over-the-counter derivatives trades that are set to be exempted from stringent rules being drawn up by US and European regulators represent a “time bomb”, market participants have warned. Their comments come as regulators globally put the finishing touches on sweeping derivatives trading rules designed to combat systemic risk.

Speaking at financial services conference Sibos in Osaka, Japan, on Monday, Manmohan Singh, a senior economist at the International Monetary Fund who was speaking in a personal capacity, said the move by regulators to push standardised derivatives contracts through clearing houses will not reduce systemic risk because a large number of institutions will continue to "free-ride the system" under the new regime.