Report Card on OTC Reforms

Terry Flanagan

Financial Stability Board says much work remains in order to meet end-2012 deadlines.

With a little over a year to go until G-20’s mandated reforms in the OTC derivatives markets are due to go into effect, work is proceeding on several fronts, including legislative and regulatory frameworks, development of international standards, and industry implementations.

However, jurisdictions need to aggressively push forward in order to meet the end-2012 deadline in as many reform areas as possible, concludes a progress report released last week by the Financial Stability Board.

International regulators and supervisors are hammering out policies on the critical areas of OTC reform, such as central clearing, trade reporting to repositories, and exchange and electronic platform trading.

The policies will be published later this year or early next year, the FSB report said.

The OTC Derivatives Regulators’ Forum (ODRF) is developing cooperative oversight arrangements among authorities involving OTC derivatives central counterparties (CCPs) and trade repositories with wide international memberships.

This month, the ODRF met with a number of OTC derivatives CCPs and trade repositories. The authorities discussed with the CCPs and trade repositories a number of issues around the practical experience of information sharing between authorities and the infrastructures, and the role of the infrastructures as regulatory reforms are implemented, along with general market developments.

“The ODRF is trying to standardize the processes involved in swap data repositories,” John McPartland, senior policy advisor in the financial markets group
at the Federal Reserve Bank of Chicago, said at Markets Media’s Chicago Trading and Investing Summit this month.  “They are trying to address what national authority is entitled to what data under what circumstances.”

The OTC Derivatives Supervisors Group (ODSG) in March published a strategic roadmap of industry initiatives and commitments from the G14 dealers, including standardization, central clearing, risk management and transparency.

The Committee on the Global Financial System is preparing a report on the macro-financial implications of alternative configurations for access to CCP in OTC derivatives.

The Intentional Organization of Securities Commissions (IOSCO) is preparing a report for publication in January on international standards to address coordination of central clearing requirements with respect to products and participants, and any exemptions from clearing requirements.

To date, the United States and Japan are the only jurisdictions that have adopted legislation mandating central clearing of standardized OTC derivatives. The Council of the European Union has agreed on a text of European Market Infrastructure regulation (EMIR) that will guarantee open access to clearinghouses for OTC derivatives, while ensuring that clearinghouses have unfettered access to data feeds from execution venues.

The FSB report noted that the principles for financial market infrastructures, including CCPs and TRs, which have been issued for consultation by IOSCO and CPSS, are expected to ensure a robust global level of constancy across jurisdictions.

Still, overlaps and conflicts may arise between jurisdictions in their adoption of legislative and regulatory frameworks for oversight of FMIs.

This point was driven home by CFTC chairman Gary Gensler, who in a speech last week at the London School of Economics, pointed out differences between EMIR and the U.S. Dodd0-Frank Act on mandatory clearing.

In particular, Gensler noted that EMIR should require clearing of most clearable swaps, regardless of whether they are traded on- or off-exchange.

EMIR should also include, Gensler said, the same critical components as Dodd-Frank for regulation of swaps dealers, including capital and margin, risk mitigation techniques, and regulatory reporting.

“With the significant majority of the worldwide swaps market located in the U.S. and Europe, the effectiveness of reform depends on our ability to cooperate on this much needed regulations,” said Gensler.

The U.S. is the only jurisdiction that has adopted legislation requiring exchange and electronic platform trading of standardized derivatives, and is working to put in place implementing regulation, the FSB report noted.

The European Commission has indicated that it expects, as part of amendments to MiFID, to require all OTC derivatives that are subject to the mandatory clearing obligation and that are sufficiently liquid to be executed on regulated markets, multilateral trading facilities, or organized trading facilities.

Brazil, Japan, and the U.S. have legislation requiring reporting of OTC derivatives transactions to a trade repository. EMIR will have similar requirements.

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