Treasury and FSA have published the UK perspective on the reform of OTC derivatives markets. They think certain actions are needed to address the systemic shortcomings of the markets: greater standardisation of OTC derivatives contracts, which would help process efficiency and use of CCP and organised platform clearing and trading;
- stronger counterparty risk management, which should require all financial firms to use CCP clearing for eligible products;
- international agreement on which products are "clearing eligible", so regulators can set targets for CCP usage;
- appropriate capital charges that reflect risks to the financial system which should be higher for non-centrally-cleared trades;
- trade repository registration of all relevant trades to ensure regulators have access to information;
- greater transparency of OTC trades to the market, although this should be calibrated to minimise scope for an adverse impact on liquidity; and
- if all this happens, there should be no need to mandate trading of standardised derivatives on organised platforms.
The paper explains how the UK regulators think these measures should move forward.
