While the regulation process continues for the over-the-counter derivatives market, the Financial Stability Board (FSB) found in its sixth progress report that the industry in general has made “good progress” on implementing these reforms put forth by the G20.
The report “isn’t the end-all-be-all, but it is a little helpful to see a bit of a heat chart around what the world is doing in this area,” said Judson Baker, head of product for derivatives and collateral management at Northern Trust.”
The FSB found that although progress has been made, the uncertainty of what the final regulations will be has prevented full implementation. To date, only about half of FSB member jurisdictions would be ready for to comply, with the most members ready for trade repositories, but the majority need to finalize regulation in other areas such as central clearing before all market participants can implement these reforms.
“There were some early adopters at the end of last year, so we’ve been processing centrally cleared swaps for a while now, [but] there are still a number that aren’t there,” said Paul d’Ouville, global head of product management at Northern Trust.
Even though reforms still need to be further developed, the FSB report determined that larger market participants are more prepared than smaller ones, because even before the G20’s reform initiatives, these larger parties utilized centralized infrastructure such as trade repositories and CCPs for OTC derivatives trading. The concentration of infrastructure providers has increased, which the FSB intends to monitor, especially considering smaller market participants will have to rely on other firms to access this infrastructure.
In terms of how market participants are using this infrastructure, nearly 100% of gross notional outstanding amounts of interest rate and credit derivatives were reported to trade repositories by the end of 2012, but the levels of regulatory preparedness are far lower for other asset classes. Interest rate and credit derivatives also lead other asset classes for central clearing compliance, but the FSB found “that substantial scope exists for further increases in central clearing in the short- to medium-term.”
The FSB report also found a need for greater international clarity in terms of removing gaps and inconsistencies with cross-border implementation and improving the understanding between various regulatory bodies. Last week, the CFTC published guidelines in order to help the G20 leaders improve cross-border implementation, which Baker said he found “refreshing” because there needs to be “more harmonization” amongst the various regulatory agencies.
“With the volume of change that’s gone on around the regulatory landscape, where there’s clarity, where they can get the conclusions, you’ll see action,” said d’Ouville.
The FSB’s next progress report will come out in April 2014.
FSB Sees Progress, But More Clarity Needed to Implement OTC Derivatives Reforms
While the regulation process continues for the over-the-counter derivatives market, the Financial Stability Board (FSB) found in its sixth progress report that the industry in general has made “good progress” on implementing these reforms put forth by the G20.