The private sector infrastructure necessary to trade, clear and record over-the-counter (OTC) derivative transactions is now ready but regulatory uncertainty is blocking everyone from using these new exchanges, according to the Financial Stability Board (FSB).
The FSB’s fourth progress report on reforming OTC derivatives, which triggered fears of contagion during the global financial crises, showed that the United States, the European Union, Hong Kong and Japan have made further progress in meeting the goal of trading and clearing through central counter parties by end-2012.
But agreeing on cross-border rules is lacking and the FSB urged regulators worldwide to identify and develop options to tackle the shortcomings to help meet the end-2012 commitment to central clearing.
The financial crises revealed that OTC derivatives had contributed to the build-up of systemic risk and the global nature of these markets - where buyers and sellers are frequently located in different jurisdictions - makes globally consistent regulation essential.
In September 2009 the Group of 20 (G20) leaders agreed that all standardized OTC derivatives contracts should be traded on exchanges or electronic trading platforms and cleared through central counter parties by end-2012 at the latest. OTC contracts should also be reported to trade repositories, a body that collects and maintains the records of all trades.
The FSB, which coordinates international financial regulation, was asked by G20 to keep track of this reform and regularly report back. The FSB will be reporting the progress and remaining problems seen in its fourth report to G20 finance ministers in November.
“Market infrastructure is in place and can be scaled up,” the FSB said, adding the international policy work for global clearing is substantially completed and implementation is proceeding at a national level.
"Regulatory uncertainty remains the most significant impediment to further progress and to comprehensive use of market infrastructure," the FSB cautioned.
"Jurisdictions should put in place their legislation and regulation promptly and in a form flexible enough to respond to cross-border consistency and other issues that may arise. Regulators need to act by end-2012 to identify conflicts, inconsistencies and gaps in their respective national frameworks, including in the cross-border application of rules. They need to work together quickly to address the identified issues."
Click to read the FSB's progress report on the implementation of OTC Derivatives Market Reform.