FSB Report Highlights OTC Reform Challenges

The FSB releases semi-annual reports on legislative and practical progress on the reform for Group-of-20 (G20) leaders. In 2009, the G20 mandated that by the end of 2012, all OTC contracts should be reported to trade repositories, all standardized contracts should be traded on electronic platforms or exchanges and centrally cleared, and that non-centrally cleared contracts should be subject to higher capital requirements.

In its report, the FSB says that around 75 percent of its member jurisdictions have plans to put frameworks in place to facilitate reporting to trade repositories, while most of the largest derivatives markets have central clearing in place. The Board highlighted cross-border regulatory agreements signed of late, such as those between the US Commodity Trading Futures Commission (CFTC) and foreign regulators, as being a key mark of progress. Standards for infrastructures such as central counterparties (CCPs)─the middlemen through which trades are cleared─are underway, and the report acknowledged concerns over these utilities becoming "too big to fail".

Further Work
The report also notes several areas that need further progress to fulfil G20 expectations, however. Increasing the use of platforms for trading standardized contracts, along with central clearing, the establishment of resolution mechanisms for utilities such as CCPs and greater clarity from regulators are among the key points. On the subject of authorities, the FSB says that they need to have mechanisms and technology in place to use the data reported to trade repositories, and that extended discussions are needed on cross-border cooperation when it comes to regulatory regimes.

On the participant side, the FSB says that most are making good progress, and singles out the use of trade reporting and central clearing in interest-rate and credit-default swap transactions, which are among the most electronic in nature for OTC instruments.