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Derivatives markets reform is only one key area of post-crisis regulatory efforts. There is also significant progress in making the banking system more resilient; implementation of too-big-to-fail reforms is advancing, including via the establishment of effective resolution regimes for banks; and those aspects of non-bank financial intermediation that contributed to the financial crisis have declined significantly and generally no longer pose financial stability risks. But, as today’s conference shows, important issues still lie ahead. What I would like to do in my remarks is to put CCP-related reforms into perspective – by looking back at what we have accomplished, and discuss what remains to be done from the perspective of the FSB; and by relating CCP-related policy measures to progress in other areas.
Policy measures to promote central clearing are working. Last year, the FSB, Basel Committee on Banking Supervision (BCBS), Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published the results of its evaluation of the incentives to centrally clear OTC derivatives. The report found that the reforms – particularly capital requirements, clearing mandates and margin requirements for non-centrally cleared derivatives – are achieving the goal of promoting central clearing, especially for the most systemic market participants. However, the report also found that beyond the systemic core of the derivatives network of CCPs, dealers/clearing service providers and larger, more active clients, the incentives are less strong.
Financial reforms around central clearing have fixed the main fault lines exposed by the financial crisis in derivatives markets. Increased clearing has simplified the previously complex and opaque web of derivatives exposures. The CCPs supporting that clearing are more resilient. In addition, more collateral is in place to reduce counterparty credit risks within the system. Some estimates suggest that an additional $1 trillion of collateral is now held globally against all derivative trades.
The evaluation of the effects of reforms is a new, key area of FSB work. Assessing the effects of policies should be an integral part of policymaking. The objective of such evaluations is to assess if reforms are working as intended and in an efficient manner, and to identify areas where adjustments may be appropriate to address material unintended consequences, but without compromising on agreed levels of resilience. In July 2017, G20 Leaders endorsed the FSB framework for the evaluation of post-implementation G20 financial reforms.
The shift to central clearing has made derivative markets more transparent and risks better managed. At the same time, it is critical to understand CCPs as an integral part of an interconnected global financial system. This understanding is equally important for the proper design of CCP risk management; effective supervisory cooperation; and regulation that promotes financial stability.