The Federal Reserve Bank of New York has demanded that over-the-counter (OTC) derivatives need additional central clearing requirements and greater transparency. The report, by members of the New York Fed and Darrell Duffie, a finance professor at Stanford University, stated that moving OTC derivatives onto central clearing houses would reduce risk.
Through the use of central counterparties, greater data would be available to the market, the report said. “Increased market transparency to the public enhances the price-discovery function of derivatives markets, improves the provision of liquidity to hedgers and those anxious to exit their positions and offers greater protections to unsophisticated or uninformed market participants, it explained.
The report made clear that the OTC clearing houses would also need to be heavily regulated, to avoid a concentration of risk.
The report comes after a quiet spell in the OTC derivatives debate. 2009 saw many U.S. regulators and politicians considering how much of the OTC derivatives market could be moved through central clearing houses. Interest rate swaps and credit default swaps are already centrally cleared, with ICE and CME Group offering clearing services.
The report also stated that the most liquid derivatives should be traded on exchanges, although the authors issued a caveat that not all OTC derivatives could be cleared through these venues.
Collateral rates also needed to increase in order to limit risk.
The full report can be found here