HM Treasury has published the speech made by Lord Myners (Financial Services Secretary) at the AFME Market Liquidity Conference.
In his speech Lord Myners discusses reforming the OTC derivatives markets and the use of central counterparties (CCPs). Lord Myners covers:
- Banking reform. Lord Myners states that there needs to be a banking system that is better able to resolve failing firms without systemic consequences; or calling on the tax payer. He accepts that rebuilding the system will take time and that this will also involve examining the ‘plumbing of the banking system’ and the use of OTC derivatives and central clearing.
- Derivatives and central clearing. Despite not being a direct cause of the financial crisis, Lord Myners acknowledges that weaknesses were revealed in the OTC derivatives markets. Most apparent were deficiencies in the management of counterparty credit risk and a lack of transparency over risk concentrations. Lord Myners argues that the key to reform is better management of systemic risk. To do this he calls on the use of standardised contracts wherever possible, making greater use of CCPs for ‘clearing eligible’ contracts and the setting of high global operational and prudential standards for CCPs.
- Greater standardisation. The UK supports the G20’s call for greater standardisation of derivatives contracts. However, standardisation alone is not sufficient for CCP clearing. According to Lord Myners when determining if a contract is ‘clearing eligible’ a CCP will need to have regard to the regular availability of prices and the sufficient depth of market liquidity. The CCP will also need to ensure that the product does not contain risk attributes that cannot be mitigated against. Lord Myners also states that once clearing eligible products are identified regulators should set challenging targets for CCP usage. Regulators should also actively monitor the progress made against these targets.
- Ensuring CCPs are run to high global standards. Lord Myners notes that there is international recognition that current EU and global CCP standards need toughening and the UK supports the CPSS-IOSCO review of CCP standards. The UK also urges the European Commission, which plans to publish a Markets Infrastructure Directive this year, to align their proposals with the new CPSS-IOSCO standards. Lord Myners also states that one other area the UK would like to see strengthened is the level and quality of CCP’s capital. At present CCPs and central securities depositories (CSDs) are required to hold sufficient capital to enable them to complete an orderly closure or transfer of their activities. This could be adapted to explicitly cover operational, business and legal risks and to reflect the systemic importance of CCPs/CSDs.
- Implementing global standards. As OTC derivatives markets are global Lord Myners argues that it is critical that the regulatory response is coordinated globally and consistently across all jurisdictions. However, he also states that supervisory responsibility and authorisation should reside with the Home State. He also mentions that given the global nature of OTC derivative markets, it will be essential that appropriate information sharing arrangements are in place between the authorities.
View AFME Market Liquidity Conference, 3 February 2010