Progress on OTC derivatives market reform falls short

The G20 commitments include that all standardized OTC derivative contracts be traded on exchanges or electronic trading platforms, and cleared through central counterparties (CCPs); that OTC derivative contracts be reported to trade repositories; and that non-centrally cleared contracts be subject to higher capital requirements.

The FSB report finds that less than half of its member jurisdictions currently have legislative and regulatory frameworks in place to implement the G20 commitments, and “there remains significant scope for increases in trade reporting, central clearing, and exchange and electronic platform trading in global OTC derivatives markets”, it says.

That said, it notes that FSB jurisdictions remain committed to completing the reforms; and, it says that progress in meeting the G20 commitments is expected to accelerate this year, as jurisdictions finalize legislative and regulatory frameworks and as specific requirements come into force. It calls for rapid progress by jurisdictions that have not yet completed their legislative and regulatory frameworks.

The FSB chairman, Mark Carney, has written to all member jurisdictions requesting confirmation that legislation and regulation for reporting to trade repositories are in place, it notes; and, asking for their timetables to complete all OTC derivatives reforms. He stressed that “the need for prompt action on trade reporting should not in any way diminish the need for rapid completion of reforms in other areas, such as central clearing, capital and margining, and trading on exchanges or electronic platforms.”

It notes that jurisdictions will need to resolve a number of outstanding policy issues over the course of this year, including:uncertainties in the application of these requirements across borders; removing barriers to trade reporting; monitoring how effective incentives are in achieving the commitment that all standardized derivatives be centrally cleared; and, making progress on reforms to help move trading onto organized platforms.

Additionally, it says that further international work should take place on: remaining issues around authorities’ access to trade repository data, such as data standards; and, the feasibility of a centralised, or other mechanism, to produce and share global aggregated data.

Looking ahead, the FSB says that “an increased focus will be needed on how effective jurisdictions’ reforms have been in meeting the underlying objectives of increasing transparency, mitigating systemic risk and minimising market abuse, as well as risks of regulatory arbitrage that would undermine the effectiveness of reforms.”

The FSB says it will publish a further progress report ahead of the G20 leaders summit in St Petersburg in September 2013.