He presented the following two main risks in OTC derivatives markets:
· The first risk is that the growing use of derivatives has created deep interconnections between financial institutions. Whereas a trade on equity markets can be settled in three days, a derivatives contract might tie the parties for several years. As a consequence, financial institutions are increasingly interlinked. Moreover, these linkages are based on contracts whose clauses or governing law may vary significantly, making it extremely tricky to settle contracts when a large financial institution fails. Among other things, central banks were created to ensure that the interconnections between financial institutions resulting from interbank loans would not trigger a domino effect destroying entire parts of the banking system following a failure by a major counterparty. With the rise of derivatives markets, these interconnections have been re-established through a dense and complex network of derivatives transactions that have made the financial system less resilient.
· The second risk which has to be tackled by the new European regulation is the opacity of these OTC markets.
The roadmap set out in the G-20 declarations of September 2009, and taken up by the European Council on 2 December 2009, provided for the creation of trade repositories. These are destined to play a key role in providing transparency on OTC derivatives markets by recording all. AMF agree on the necessity to establish trade repositories. It is obvious that they should be involved in macro-supervision, but the AMF is lobbying for a more ambitious option. If the disclosures provided by financial institutions are sufficiently detailed, the trades recorded in the repositories could also be used for micro-supervision, to detect market abuse. The trade repository model that currently seems to be favoured by professionals would be suitable only for macro-supervision and would not therefore address the needs of market regulators.
© AMF - Autorité des Marchés Financiers
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