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Since the FSB’s previous progress report in October 2011, encouraging progress has been made in setting international standards, the advancement of national legislation and regulation by a number of jurisdictions and practical implementation of reforms to market infrastructures and activities. But much remains to be completed by the end-2012 deadline to achieve the G20 commitments.
Broadly speaking, the jurisdictions currently with the largest markets in OTC derivatives – the EU, Japan and the US – are the most advanced in structuring their legislative and regulatory frameworks. They expect to have regulatory frameworks in place by end-2012 and practical implementation within their markets is well underway. Other jurisdictions are generally less advanced although, as this report indicates, progress has been made by many of them, particularly with respect to central clearing and reporting to trade repositories (TRs). (The summary table following the Executive Summary provides a simplified overview of legislative and regulatory progress across the membership of the FSB, with the main text and appendices of this document providing further details.)
One reason for the slower timetables in some jurisdictions has been that authorities had been waiting for the key elements of the regulatory frameworks in the EU, Japan and the US to be finalised before putting their own legislation in place, in an effort to be consistent with these frameworks. Additionally, some jurisdictions have sought greater certainty about the application of international principles and safeguards to cross-border financial market infrastructure, including central counterparties (CCPs) and TRs, so as to make an informed decision about the appropriate form of market infrastructure for their jurisdiction.
Since the October 2011 progress report, standard-setting bodies have made significant progress in developing the international policies that facilitate the advancement of OTC derivatives reforms across jurisdictions, notably:
Additionally, the Committee on the Global Financial System (CGFS) reported in November 2011 on the macro-financial implications of alternative arrangements for access to CCPs. IOSCO published in January 2012 further analysis of the types of organised trading platforms (i.e. exchanges and electronic trading platforms) available for OTC derivatives transactions. These reports provide further insight to national authorities deciding on the form of financial market infrastructures needed in their jurisdictions. International workstreams are also progressing rapidly to develop frameworks for a global legal entity identifier (LEI); guidance on resolution of CCPs; international principles on margin requirements for non-centrally cleared derivatives; capital adequacy rules for exposures to CCPs; and work on regulatory access to data from TRs.
With international standard-setting and policy guidance now largely complete, jurisdictions need promptly to develop and implement legislative and regulatory frameworks. These frameworks should be comprehensive, consistent, and also flexible enough to facilitate continued cooperation on issues as they arise because not all potential issues can be identified and solved in advance of legislative and regulatory implementation. Extensive cross-border cooperation is needed on an ongoing basis to promote the safety and efficiency of market infrastructures, including CCPs and TRs.
Full and consistent implementation by all FSB members is important to reduce systemic risk and the risk of regulatory arbitrage that could arise if there are significant gaps in implementation. The OTC derivatives markets are already global markets, in which market participants can easily redirect their activities to other jurisdictions to take advantage of regulatory arbitrage if jurisdictions have not fully and consistently implemented the measures.
But legislation and regulation are not by themselves enough. Market participants need to take practical steps to ensure that the necessary market infrastructure is available by further expanding the number and scope of OTC derivatives transactions that are standardised, centrally cleared, traded on organised platforms and reported to TRs. Failure to implement the commitments by the agreed deadline risks a loss of momentum for reform, in addition to failing to deliver the benefits of improved transparency, mitigation of systemic risk and protection against market abuse.
Under the guidance of the OTC Derivatives Supervisors Group (ODSG), market participants made some strides towards increased central clearing and trade reporting even before agreement on the G20 commitments. For example, among the 14 largest derivatives dealers (the “G14”), a significant proportion of OTC interest rates and credit derivatives trades are being reported to TRs. This proportion continues to increase, albeit recently at a slower pace in anticipation of the adoption of regulatory frameworks. TRs are or soon will be in place to support trade reporting in all the major OTC derivatives asset classes. Similarly, standardisation by the largest global dealers and other major market participants has advanced, so that a higher proportion of derivatives can be electronically processed.
With respect to centrally clearing OTC derivatives, although some data exists to measure this progress, data sources continue to be incomplete and not directly comparable. In the population of outstanding trades where products are already offered for clearing by a CCP and one counterparty is a G14 dealer, rough estimates indicate half of the notional outstanding of interest rate derivatives and credit default swaps were centrally cleared as of end-2011. In contrast, looking instead at the total population of outstanding trades (including non-standardised products and all counterparties), rough estimates indicate one-eight of credit default swaps and one-third of interest rate derivatives were centrally cleared as of end-2011. Further progress is still needed to increase central clearing.
This report concludes that good progress has been made from an international policy perspective and from a practical perspective in those jurisdictions with the largest OTC derivatives markets. However all jurisdictions and markets need to push ahead aggressively to achieve full implementation of market changes by end-2012 to meet the G20 commitments in as many reform areas as possible. Jurisdictions have sufficient information about international standards and policies to put in place the needed legislation and regulation. They should do so promptly, and in a form flexible enough to respond to cross-border consistency and other issues that may arise.