On 3 February 2010, the Treasury published a speech that Lord Myners (Financial Services Secretary) made at the AFME Market Liquidity Conference.
In his speech Lord Myners discussed reforming the OTC derivatives markets and the use of central counterparties (CCPs) under the following headings:
- Banking reform. Lord Myners stated that there needed to be a banking system that is better able to resolve failing firms without systemic consequences or calling on tax payer assistance. He accepted that rebuilding the system would take time and that it would 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 acknowledged that some weaknesses had been 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 argued that the key to reform was the better management of systemic risk. This could be achieved through the use of standardised contracts wherever possible, greater use of CCPs for ‘clearing eligible’ contracts and setting high global operational and prudential standards for CCPs.
- Greater standardisation. Lord Myners confirmed that the UK Government supports the G20’s call for greater standardisation of derivatives contracts. However, the UK Government believes that 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 called on regulators to set challenging targets for CCP usage once clearing eligible products were identified.
- Ensuring CCPs are run to high global standards. Lord Myners acknowledged international recognition that current EU and global CCP standards need toughening and confirmed that the UK Government supports the CPSS-IOSCO review of CCP standards. He also called on the European Commission, which intends to publish a Markets Infrastructure Directive this year, to align its proposals with the new CPSS-IOSCO standards. Lord Myners also stated that the UK Government would like to see the level and quality of CCP capital strengthened. Currently 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 argued that it is critical that the regulatory response is coordinated globally and consistently across all jurisdictions. However, he also stated that supervisory responsibility and authorisation should reside with the Home State.
View AFME Market Liquidity Conference, 3 February 2010