European securities regulators have concluded that, with the development of central clearing obligations, the distinction between over-the-counter (OTC) and exchange-traded derivatives no longer makes sense when calculating counterparty risk for investment funds.
The European Securities and Markets Authority (ESMA) published an opinion Friday that calls on policymakers to revise the rules governing so-called collective investment schemes, such as investment funds and pension funds. It says that the rules should no longer distinguish between OTC transactions in financial derivatives and exchange-traded derivative transactions.
Currently, funds can invest in both types of derivatives, but the rules impose limits on counterparty risk exposure to OTC derivatives. Instead, of discriminating between OTC and exchange-traded derivatives, the ESMA says that the distinction should be drawn between cleared and non-cleared OTC derivative transactions. And, the ESMA says that the rules should be revised to take into account the clearing obligations for certain OTC trades.
“ESMA’s opinion is that counterparty risk limits should be calibrated to the different types of segregation arrangements taking into account elements such as the portability of the position in the case of a default of the clearing member,” it says in an opinion published today.
The conclusion follows a discussion paper published last July by the ESMA that examined the calculation of counterparty risk for OTC financial derivative transactions that are subject to clearing obligations. This followed the adoption of new rules on OTC derivatives, central counterparties and trade repositories that impose obligations on investment funds to clear certain OTC derivatives transactions.
Steven Maijoor, chair of the ESMA, that the creation of clearing obligations for certain OTC transactions “has a significant impact on the calculation of counterparty risk” that can’t be resolved without revising the rules in this area.