HM Treasury and the FSA have published a joint paper which is entitled Reforming OTC Derivative Markets - A UK perspective.
In this paper the Treasury and the FSA (the Authorities) propose that the following measures need to be implemented and/or developed to address systemic shortcomings in OTC derivative markets:
- Greater standardisation of OTC derivative contracts. The FSA will work with international regulators to take steps to identify and agree which products can be further standardised, both in terms of underlying contract terms and operational processes, and ensure that this is implemented on a timely basis.
- More robust counterparty risk management. All OTC derivative trades, whether or not centrally cleared, should be subject to robust arrangements to mitigate counterparty risk. For all financial firms this should be through the use of central counterparty (CCP) clearing for clearing eligible products. For trades that are not centrally cleared these should be subject to robust bilateral collateralisation arrangements and appropriate risk capital requirements.
- Consistent and high global standards for CCPs. In Europe, the UK has been leading calls for a Clearing Directive and will press to ensure that this is an effective tool in mitigating any risk that CCPs will pose to the financial system.
- International agreement as to which products are ‘clearing eligible’. This will require assessment by both regulators and CCPs in deciding which products are eligible for clearing.
- Capital charges to reflect appropriately the risks posed to the financial system. These should be higher for non-centrally cleared trades and the Authorities are working through the Basel Committee to deliver a proportionate approach.
- Registration of all relevant OTC derivative trades in a trade repository. The Authorities are working through the OTC Derivative Regulators Forum to deliver this across a number of asset classes.
- Greater transparency of OTC trades to the market. Consideration should be given to using existing reporting channels to minimise costs.
- On-exchange trading. Once the above steps have been taken the Authorities do not see at this stage the need for mandating the trading of standardised derivatives on organised trading platforms.
View Reforming OTC Derivative Markets - A UK perspective, 16 December 2009