According to a report by BNY Mellon – entitled 'Sovereigns in Search of Solutions: OTC Derivatives Reform: Direct and Indirect Impacts' – a number of inconsistencies in the application of key OTC reform provisions remains between regulations in Asia Pacific, Europe and the US. The asset management firm claimed that this inconsistency could raise "important" issues for sovereigns regarding their obligations and the potential cost of compliance.
Jai Arya, head of BNY Mellon's sovereign institutions group, said: "Sovereigns are generally regarded as low-risk counterparties, and as such have not generally been required to provide collateral. With global regulatory reforms, however, precisely what is in and out of scope with respect to sovereigns remains murky."
Arya went on to say that the classification of sovereigns and "subsequent variation" in Basel III capital adequacy rules must be addressed to avoid market distortions and regulatory arbitrage.
A number of new pieces of legislation are currently underway to centralise and manage counterparty credit risk and increase transparency by pushing derivatives trades into central clearing. While Washington is currently implementing the Dodd-Frank Act, Brussels is working on the introduction of the European Markets and Infrastructure Regulation (EMIR).
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