FSB Publishes Fifth Progress Report on Implementation of OTC Derivatives Market Reforms

Introduction

On 15 April 2013, the Financial Stability Board (FSB) published its Fifth Progress Report on the implementation by FSB member jurisdictions of the G20 commitment to reform global OTC derivatives markets.  The next progress report is expected to be published ahead of the G20 Leaders Summit in St Petersburg in September 2013.

In summary, the report concludes that sufficient international guidance is available to jurisdictions to assist in the implementation of the G20 commitments.  It recognises that substantial progress has been made towards meeting the G20 commitments and expects that the rate of implementation will accelerate over the course of 2013.  In support of this, the report notes that, in the period between 2009 and 2012, the use of central counterparties (CCPs) and trade repositories (TRs) for interest rate derivatives and credit derivatives had “notably increased…particularly by the G15 dealers”.  However, it was acknowledged that no jurisdiction had fully implemented the G20 requirements by the end of 2012.  Indeed, less than half of FSB member jurisdictions currently have the necessary legislative and regulatory frameworks in place.  Unsurprisingly, the European Union, Japan and the United States are the most advanced in their reform programmes, but even here full implementation of the necessary reforms will persist “well beyond 2013”.

Trade reporting

The report concludes that “about half” of FSB jurisdictions have confirmed that trade reporting in at least some asset classes will come into force in the first half of 2013.  However, issues remain with respect to:

• ensuring that necessary data is reported to a TR;
• the ability to aggregate TR-held data; and
• authorities’ access to TR-held data.

It was estimated that over 90% of gross notionals with respect to both interest rate and credit derivatives had been reported to TRs by mid-2012.  However, there was little evidence of reporting of commodity, equity or FX derivatives.

Transaction Standardisation

The report states the belief that measures in relation to non-centrally cleared transactions, such as confirmation timelines, portfolio reconciliation and compression, and trade valuation can promote product and process standardisation, but concludes that “only a small number of jurisdictions” are currently placing such obligations on market participants.

Exchange and electronic platform trading

The report concludes that “only a very small number of jurisdictions” have requirements in force in this area. 

Central clearing

The report estimates that “half the jurisdictions in the FSB” have established frameworks which will facilitate central clearing of OTC derivatives.  It believes that the relatively low level of adoption is caused by a number of factors, including:

• insufficient product standardisation;
• lack of available CCPs; and
• lack of implementation of incentives to centrally clear, such as the higher capital requirement for non-centrally cleared transactions under Basel III and the BCBS/IOSCO margining requirements for non-centrally cleared trades.

The report notes that, as of February 2013, with respect to OTC interest rate derivative products offered for clearing by a CCP, “around 50%” of gross notional outstandings of the G15 dealers had been centrally cleared.  When all OTC interest rate derivatives were considered (i.e. including those that were offered for clearing by CCPs and those that were not) this figure fell to “around 40%”.  “Around 30%” of the notional outstanding of all market participants with respect to OTC credit derivative products offered for clearing by CCPs had been cleared during the same period, with this figure falling to “around 12%” when all credit derivatives (i.e. including those that were offered for clearing by CCPs and those that were not) were considered.  Central clearing of commodity, equity and FX derivatives was not yet “well established at a global level”.

Cross-border consistency and cooperation

The report concludes that the uncertainty caused by delays in adopting regulatory frameworks to meet the G20 commitments are being compounded by a lack of clarity “in almost all FSB jurisdictions” regarding the approach to cross-border issues.  The FSB believes that much work remains to be done by its members in this area.

International standards and guidance

The report confirms that most of the planned international guidance from standard-setting bodies that is needed to assist with implementation of the G20 reforms had already been published, but that the following remains to be finalised: