FSB Sees Some Progress in OTC Reform

Progress has been made in setting and implementing international standards for over-the-counter (OTC) derivatives market reforms in a number of jurisdictions, according to the latest progress report by the Financial Stability Board (FSB).

Published every six months, the FSB report reviews progress made by international standard-setting bodies, national and regional authorities, and market participants toward getting all standardized OTC contracts to be traded on exchanges or electronic trading platforms and cleared through central counterparties (CCPs), having OTC derivative contracts be reported to trade repositories, and making non-centrally cleared contracts be subject to higher capital requirements.

The jurisdictions with the largest markets in OTC derivatives—the EU, Japan and the US—are the most advanced in structuring their legislative and regulatory frameworks, the report says. They expect to have regulatory frameworks in place by the end of 2012 and practical implementation within their markets is well under way. Other jurisdictions are generally less advanced. One reason is that some jurisdictions have been waiting for the key elements of the regulatory frameworks in the EU, Japan and the US to be finalized before putting their own legislation in place. Others have sought greater certainty about the application of international principles and safeguards to cross-border financial market infrastructure.

Based on its findings, the FSB recommends that market participants expand the number and scope of OTC derivatives transactions that are standardized, centrally cleared, traded on organized platforms and reported to trade repositories.

In the next progress report, to be published before the November G20 Finance Ministers and Central Bank Governors meeting, the FSB intends to put additional focus on the readiness of infrastructures to provide central clearing, platform trading and reporting of OTC derivatives, the practical ability of industry to meet the requirements, and the remaining steps for industry to take.