The Committee of European Securities Regulators (CESR) has published its response to the European Commission’s Consultation Document on the possible initiatives to enhance the resilience of OTC derivatives markets.
CESR’s response is in the form of a general policy view, based on its work in the areas covered in the consultation, rather than a set of responses to the individual questions set out in the Consultation Document.
In its response CESR lists the elements that in its view are important in guiding regulatory actions in the field of derivatives markets: sufficient level of transparency of trading, market integrity (supported by relevant information provided to regulators), reduction and management of risks, as well as appropriate product disclosures, facilitated also through means of standardisation, where appropriate.
The areas covered in the consultation on which CESR has arrived at a view include:
- Use of central data repositories. CESR believes that the operation of a trade repository should meet a number of objectives, including reporting to and supervision by competent authorities, transparency, legal soundness, governance, operational resilience, and fair access criteria. Trade repositories should aim to foster the efficiency, stability and orderly functioning (i.e. avoidance of abusive behaviour) of financial markets. CESR intends to consult on the use of trade repositories in the near future. The consultation will raise, among others, issues related to the basic functions of such entities and the implications of the location (within or outside the EU) of such entities.
- Safety and soundness of CCPs (central counterparties). CESR, in coordination with a number of other bodies (including the European System of Central Banks (ESCB), the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO)) has developed draft recommendations to promote competitive, efficient, safe and sound pan-European post-trading arrangements and reduction of systemic risk. CESR also supports the Commission’s initiative to promote industry efforts for CCP clearing of credit default swap (CDS) contracts.
- Transparency of trading. CESR concluded in its July 2009 report on the transparency of corporate bond, structured finance product and credit derivatives markets that market-led initiatives would need to be augmented by a mandatory trade transparency regime for corporate bonds, structured finance products and credit derivatives in order to provide a sufficient level of transparency in these markets. CESR holds the view that a post-trade transparency regime should cover all CDS contracts which are eligible for clearing by a CCP due to their level of standardisation, including single name CDS, although there may not yet be an offer for clearing of these CDS by a CCP. In general, post-trade transparency requirements should apply equally within both the regulated and non-regulated markets and multilateral trading facilities (MTFs).
- Transaction reporting of OTC derivatives. Because there are OTC financial instruments that mirror instruments traded on regulated markets, which creates a potential source of market abuse, CESR is working on updating its Transaction Reporting Exchange Mechanism (TREM) to facilitate the exchange of transaction reports on OTC derivative instruments amongst CESR members. Transaction reports would be exchanged for those on those OTC derivatives whose underlying instrument is admitted to trading on a regulated market. Further, CESR supports the extension of Article 25 of MiFID (Markets in Financial Instruments Directive) to make the collection of transaction reports on OTC derivatives mandatory to all competent authorities.
- Position reporting. CESR has not conducted its own work in this area, but believes that this is an option worth more detailed analysis.
- Need for global reporting. The global nature of financial markets makes it important for measures adopted within the EU to be coordinated with measures taken elsewhere. A framework would be adopted in Europe that would enable a productive dialogue at the international level, for example with the U.S. which is currently considering a draft bill on the regulation of OTC derivatives.