The Financial Stability Board (FSB) has published its third six-monthly progress report on the implementation of over-the-counter (OTC) derivatives market reforms. The report reviews progress made by international standard-setting bodies, national and regional authorities and market participants towards meeting the commitments made by G20 Leaders at the Pittsburgh 2009 Summit that, by end-2012, all standardised OTC derivative contracts be traded on exchanges or electronic trading platforms, where appropriate, 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 report notes that, since the previous FSB progress report in October 2011, encouraging progress has been made in setting international standards, the advancement of national legislation and regulation by a number of jurisdictions; and practical implementation of reforms to market infrastructures and activities. But much remains to be completed by the end-2012 deadline.
Broadly speaking, the jurisdictions with the largest markets in OTC derivatives – the EU, Japan and the US – are the most advanced in structuring their legislative and regulatory frameworks. They expect to have regulatory frameworks in place by end-2012 and practical implementation within their markets is well underway. Other jurisdictions are generally less advanced, although progress has been made by many of them, particularly with respect to central clearing and reporting to trade repositories.
One reason for the slower timetables in some jurisdictions has been that authorities had been waiting for the key elements of the regulatory frameworks in the EU, Japan and the US to be finalised before putting their own legislation in place. Some jurisdictions have also sought greater certainty about the application of international principles and safeguards to cross-border financial market infrastructure, so as to make an informed decision about the appropriate form of market infrastructure for their jurisdiction to meet the G20 commitments.
Since the October 2011 progress report, standard setting bodies have made significant progress in developing the international policies that are key to advancing OTC derivatives reform implementation across jurisdictions, notably:
- The Committee on Payment and Settlement Systems (CPSS) and International Organisation of Securities Commissions (IOSCO) issued in April 2012 Principles for Financial Market Infrastructures (PFMIs), which are an important milestone in the global development of a sound basis for central clearing of all standardised OTC derivatives.
- IOSCO published in February 2012 recommendations on requirements for mandatory central clearing.
- CPSS and IOSCO in January 2012 outlined OTC derivatives data reporting and aggregation requirements, recommending that trade repositories implement measures to provide authorities with effective and practical access.
- IOSCO in June 2012 published standards for the regulation of OTC derivatives market intermediaries.
In January 2012, the FSB responded to the request from some jurisdictions for guidance to help them make informed decisions about the form of CCPs to use in order to meet the G20 commitment on central clearing by identifying four safeguards for a resilient and efficient global framework for central clearing. Substantial progress has now been made, through international workstreams and otherwise, to provide these safeguards and thus allow authorities to make their decisions.
With international standard setting and policy guidance now largely complete, jurisdictions need to promptly develop and implement legislative and regulatory frameworks. These frameworks should be comprehensive, consistent, and also flexible enough to facilitate continued cooperation on issues as they arise because not all potential issues can be identified and solved in advance of legislative and regulatory implementation. Full and consistent implementation by all FSB members is important to reduce systemic risk and the risk of regulatory arbitrage that could arise if there are significant gaps in implementation.
But legislation and regulation are not by themselves enough. Market participants need to take practical steps to ensure that the necessary market infrastructure is available by further expanding the number and scope of OTC derivatives transactions that are standardised, centrally cleared, traded on organised platforms and reported to trade repositories. Under the guidance of the OTC Derivatives Supervisors Group, market participants made some strides towards increased central clearing and trade reporting even before agreement on the G20 commitments. Nevertheless, further progress is still needed both by the largest dealers and by other market participants.
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