News

The UK FSA and HM Treasury have published a joint paper 'Reforming OTC derivative markets - A U.K. perspective' in which we set out the steps we believe need to be taken to address the key risks highlighted within these markets by the financial crisis, namely shortcomings in the management of counterparty credit risk and the absence of sufficient transparency. These steps include measures to promote:

·          Greater standardisation of OTC derivatives contracts;

·          More robust counterparty risk management, of both cleared and non-cleared trades;

·          Consistent and high global standards for Central Counterparties;

·          International agreement as to which products are eligible for central clearing;

·          Capital charges to reflect appropriately the risks inherent in OTC derivatives;

·          Registration of all relevant OTC derivative trades in trade repositories; and

·          Greater transparency of OTC trades to the market.

The paper discusses why in our view, if these proposals are implemented effectively, it is unclear what benefits forcing trade flow through organised trading platforms will deliver; and outlines our preference for a broad position management approach to combat market manipulation in place of proposals for position limits.

The paper also highlights the significant amount of work underway within the international regulatory community and in partnership with the industry. In our view it is essential that legislators do not pre-judge the outcome of these pieces of work; that careful consideration is given to this work when defining legislation; and that there is not an unnecessary duplication of efforts in these areas.

As further detail of the package for regulatory change emerges we look forward to working with our colleagues across the globe to ensure that an internationally consistent set of definitions and outcomes are achieved so as to maximise the impact of these historic reforms.

http://www.fsa.gov.uk/pubs/other/reform_otc_derivatives.pdf