The Financial Stability Board (FSB) has published its 5th six-monthly progress report on the implementation of over-the-counter (OTC) derivatives market reforms.
The report reviews the progress made by standard-setting bodies, national and regional authorities and market participants towards meeting the commitments (made by G20 Leaders at the Pittsburgh Summit in 2009) that:
- all standardised OTC derivative contracts be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties (CCPs);
- OTC derivative contracts be reported to trade repositories; and
- non-centrally cleared contracts be subject to higher capital requirements.
Despite progress through international policy development, adoption of legislation and regulation, and expansion of infrastructure, and the commitment of FSB member jurisdictions to completing the agreed reforms, no jurisdiction had fully implemented requirements by end-2012. Fewer than half of the FSB member jurisdictions have legislative and regulatory frameworks in place to implement the G20 commitments.
The European Union (treated in the report as one jurisdiction), Japan and the United States host the largest volumes of OTC derivatives activity and are among the most advanced in implementing legislative and regulatory reform, with several key regulatory measures in force (or becoming so) by mid-2013. However, the timeline for applying the full spectrum of reforms to implement the G20 commitments still stretches well beyond 2013.
A number of other jurisdictions report that they expect regulatory measures related to trade reporting to come into force over the course of this year, and a few jurisdictions expect clearing requirements to come into force in 2013–2014.
At present only three jurisdictions have (or expect to soon have) requirements adopted and in force for OTC derivatives to be traded on organised platforms, where appropriate; some of these requirements pre-date the 2009 G20 commitments
Around half of FSB member jurisdictions have adopted rules to implement the Basel III capital framework for banks, including higher capital requirements for non-centrally cleared transactions. Remaining jurisdictions should also adopt such requirements as soon as possible. All jurisdictions should quickly implement additional international standards for capital and margin requirements once these are finalised, to ensure that appropriate incentives to centrally clear are in place and to strengthen the resilience of markets for non-centrally cleared transactions.
Various outstanding policy issues remain to be resolved this year, including:
Uncertainties in the application of requirements in cross-border contexts: potential cross-border conflicts, inconsistencies, duplication and gaps have emerged as jurisdictions move forward in implementing rules and requirements:
- Regulators must work together to urgently address these identified issues, given that practical implementation of rules is imminent across a number of jurisdictions.
- Jurisdictions also need to put forward proposals for regulatory implementation promptly.
- Trade reporting and data access: Jurisdictions should remove barriers to trade reporting by market participants, particularly barriers to reporting of counterparty information and to information access by authorities.
- Central clearing and incentives: Jurisdictions relying in the first instance on incentives to drive central clearing of standardised OTC derivatives should establish clear criteria and monitoring processes for determining how effective these incentives are in achieving the G20 commitment that all standardised derivatives be centrally cleared.
- Organised platform trading: Jurisdictions should also make progress on reforms to help move trading onto organised platforms. In the short term, they should enact legislation and regulation that would permit the imposition of trading requirements as appropriate.
Although most of the planned international guidance from standard-setting bodies required to assist with implementation of reforms has already been issued, some important pieces of international guidance have yet to be finalised, and are expected to be published by September 2013:
- BCBS and IOSCO’s Working Group on Margining Requirements (WGMR) are working towards a final set of standards by mid-2013; jurisdictions are expected to incorporate these into their regulatory regimes thereafter;
- In mid-2013, CPSS and IOSCO will publish draft guidance on FMI recovery;
- In mid- 2013, the FSB, in cooperation with CPSS and IOSCO, will publish draft guidance on FMI resolution and resolution planning;
- A joint BCBS, CPSS and IOSCO taskforce will consult on a proposal for standards for the capital treatment of banks’ exposures to CCPs, to be published by September 2013;
- CPSS and IOSCO will publish their final report on Authorities’ Access to Trade Repository Data in April 2013 before September 2013.
Further international work is also needed on:
- remaining issues around authorities’ access to TR data, such as data standards;
- the feasibility of a centralised or other mechanism to produce and share global aggregated data, taking into account legal and technical issues and the aggregated trade repository data that authorities need to fulfil their mandates and to monitor financial stability.
The FSB will publish a further progress report ahead of the G20 Leaders Summit in St Petersburg in September 2013, to update measures of progress in the use of centralised infrastructure, and provide an assessment of the state of readiness of market participants to further migrate to this infrastructure.