They stated that in case of a mandatory clearance of a particular contract, market participants should be given a reasonable amount of time to develop new systems and controls or to raise money for margin requirements without being required to close their business in the meantime.
ISDA, AFME, and the BBA are pleased to respond to the European Commission’s “Public consultation on Derivatives and Market Infrastructures”. They believe that it is appropriate that there be an EU-level initiative on these infrastructure developments. A consistent European approach is welcome in its own right, as well as in the context of global convergence of legislative and regulatory approaches at the G20 level.
The role of clearing in OTC derivatives has been developing rapidly, having been initially applied to interest rate swaps in the late 1990s; and subsequently to credit derivatives (CDS), as that market grew sufficiently large to support it. In such large, liquid markets, CCPs offer an alternative way of managing ‘interconnectedness’ by means of risk mutualisation; and incremental efficiencies in exposure reduction through multilateral rather than bilateral netting.
In this context, they believe that the paper could helpfully emphasise certain points more, though they accept that it may stop short of detailed prescription, since the exact standards applicable to a CCP will depend on the product(s) cleared, the counterparties faced and the structure it adopts. Some key points are set out below, followed by some more detailed issues, particularly as regards financial resources.
· The industry understands and fully supports the importance of of properly-managed trade repositories (TRs) in providing supervisors with trade data, including client names, to enable them to develop a more complete view of OTC derivatives market activity and thereby enhance their ability to oversee the market and its participants. This matters in assessing the distribution of counterparty and market exposure across participants, aiding the timely detection of concentrated positions by any one participant or ’crowded’ positions in any one type of trade.
· They view TRs as supporting a global market and agree that their operations should be structured to support a global supervisory community that is as co-ordinated internationally as possible. We believe that the role of TRs in systemic oversight make it essential not only that they are operationally robust but equally that there is no fragmentation of this function, since that would defeat the whole object of ensuring efficient aggregation of information by asset class. Fragmentation would also impose unnecessary cost and operational complexity and risk.
· One overarching point lies in their belief that it is vital that there be maximum transparency from CCPs regarding the specific arrangements that each has in place relating to such matters as acceptance of products for clearing; membership criteria, margining, closing out the positions of a defaulted CM, default-fund arrangements, and so on.
· They believe that the wider context is important too, as acknowledged in the reference in the paper to proportionate treatment of products that are not cleared. This could take account of the robust arrangements that are in place for bilateral clearing.
· They also note that the paper addresses the issue of passporting, but not the issues surrounding interaction with non-EU CCPs or any potentially conflicting mandates to clear a particular
· Finally, the imposition of a mandatory clearing requirement may have a significant impact on an existing trading market. Once the determination has been made that a particular contract is to be mandatorily cleared, market participants should be given a reasonable amount of time to develop new systems and controls, to raise money for margin requirements, to put appropriate documentation in place with clearing providers and to develop required risk control systems, without being required to close their business in the meantime.
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