Many of the developments in clearing over the last month have been focussed on the clearing of OTC derivatives. This is also discussed in the Turner Review, which confirms that the FSA is working with other regulators to strengthen infrastructure in this area and is engaged with several potential providers of CCP services for OTC derivatives. The FSA states that it is keen to ensure that there is supervisory cooperation and common approaches across jurisdictions, both within the EU and with the US, to enable firms to manage their risks effectively. It also emphasises the importance of greater transparency for both firms and regulators and reports that it is working alongside other supervisors to develop an information sharing platform for regulators, as well as with other regulators, central banks and market participants to enhance the release of public market data.
The Turner Review also discusses clearing and settlement arrangements in light of the Lehman Brothers default. While it states that the operation of the clearing house default arrangements were generally perceived to be effective, it is reviewing the arrangements for the holding of client positions and margins by clearing houses, and proposes a number of options. These range from simply increasing transparency, through requiring that clearing houses offer segregation for client business or requiring that client business be held on a segregated basis, to requiring that client business be held in designated client accounts and be margined on a gross basis. However, the FSA claims to recognise the need to strike a balance between the protection of the clearing house, the protection of clients and the efficiency of the UK markets, as well as the links to possible changes in the UK insolvency regime, Part VII of the Companies Act 1989 and its client assets rules.
The Turner Review accepts that some difficulties arose in the CREST system in relation to OTC transactions, causing uncertainty and significant market risk for many market participants. While the FSA is satisfied that the UK's arrangements for implementing the Settlement Finality Directive are in line with the directive, it is discussing with relevant parties the implications of its application for settlement systems and, in particular, whether the arrangements for dealing with the default of a participant can be improved. The FSA reports that Euroclear UK and Ireland has introduced additional guidance on the steps that are likely to be taken following the default of a CREST participant, and describes other possibilities for change including both market led initiatives and legislative changes.
View The Turner Review: a regulatory response to the global banking crisis, 18 March 2009
View Discussion Paper 09/2: A regulatory response to the global crisis, 18 March 2009