02.23.2012
By Terry Flanagan

Regulators Scramble to Meet G20 Deadline

Countries unlikely to have OTC reforms in place by end of year.

Regulators are racing to meet the year-end deadline set by the G20 for effecting derivatives reforms, amid growing skepticism that the goal can be accomplished.

International regulators are working to establish standards for the execution, clearing, and reporting of OTC derivatives transactions, which they acknowledge to be a moving target, as laws are being passed on the national and international levels.

“As of right now, it is hard to see the G-20, as a whole, achieving the OTC reforms that have been mandated,” Patricia Rogers, co-chair of the financial institutions group at Moye White, told Markets Media.

“In reviewing current global initiatives, there are still many inconsistencies in approaches to oversight, regulation and rules in many areas of proposed reform,” said Rogers.

In the United States, the Dodd-Frank Act requires the SEC and CFTC to hammer out rules on swaps, while in Europe, that task will be delegated to the European Securities and Markets Authority once legislative mandates (e.g., MiFID and EMIR) get finalized.

“The pressure is on,” Jiro Okochi, CEO and co-founder of Reval, which provides treasury and risk management services, told Markets Media. “Dodd-Frank rule writing is progressing, and it seems likely that most of the derivative-related rules will be completed by 2012, with many in effect as early as July 2012, the two-year anniversary of Dodd-Frank.”

There is a broad degree of commonality, including improved transparency, formalization of position limits, and an appetite to centrally clear and report OTC derivatives. However, there are also emerging differences which need to be addressed in order to reduce the potential for regulatory arbitrage.

In the wake of the global financial crisis, the G20 in 2009 resolved to have OTC reforms in place by the end of 2012.
To date, the United States and Japan are the only jurisdictions that have adopted legislation mandating central clearing of standardized OTC derivatives.

“There are a few countries, Brazil and Argentina, for example, which appear close to meeting their obligations,” said Rogers. “Everywhere else, proposals are slowly coming together, but there does not seem that significant agreements have been reached among countries as to how to effect complete harmonization.”

In Europe, OTC derivatives legislation, known as European Market Infrastructure Regulation (EMIR), calls for mandatory clearing of most swaps and reporting of swaps transactions to a trade repository.

The European Commission has also published draft proposals for a revised directive (MiFID II) as well as a regulation (MiFIR).
Provisions related to OTC derivatives are addressed primarily within MiFIR, such as mandatory execution of trades on trading venues, reporting of trading activity, and removing barriers between trading venues and providers of clearing services.

The SEC and CFTC are working on a project of the International Organization of Securities Commissions (IOSCO) to coordinate central clearing requirements for counterparties to OTC transactions, and on a project of the Committee on Payment and Settlement Systems (CPSS) and IOSCO on principles for financial market infrastructures, including CCPs and trade repositories.

The SEC and CFTC are also engaged in bilateral discussions with regulatory counterparts in the EU, Japan, Hong Kong, Singapore and Canada.

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