Posted on 20 December 2009
In this paper HMT and the FSA set out their thinking on the measures that need to be implemented to address systemic shortcomings in OTC derivative markets.
Key measures include:
- Greater standardisation of OTC derivative contracts.
- More robust counterparty risk management.
- Consistent and high global standards for central counterparties
- International agreement as to which products are ‘clearing eligible’.
- Capital charges to reflect appropriately the risks posed to the financial system.
- Registration of all relevant OTC derivative trades in a trade repository.
- Greater transparency of OTC trades to the market
- Europe and the US need to work together on any reforms
The Authorities' approach of seeking to encourage the use of OTC derivative clearing rather than mandating it differs from the approach of the EU Commission in its October communication.
There is also no enthusiasm for mandating on exchange trading of derivatives with a clear argument that the decision to remain in the OTC environment or to trade on platform should be left to the industry. Again this strikes a different note to the mandatory approach to on platform trading struck by the Commission communication.
The deadline for comments is 16 March 2010.
Related Link: FSA & HMT paper on OTC derivatives market reform
