The UK Government has stepped in line with the US administrations New Foundation Report by demanding derivatives need, as far as possible, to be standardised, liquid and have price transparency, and should be cleared through central counterparties.
In the white paper, entitled Reforming Financial Markets, Chancellor Alistair Darling named credit default swaps as a derivative that should be cleared on a central counter party.
The US report also demanded greater transparency and standardization: To contain systemic risks, the Commodities Exchange Act (CEA) and the securities laws should be amended to require clearing of all standardized OTC derivatives through regulated central counterparties.
Regarding bespoke derivatives that cannot be cleared on a CCP, the UK white paper states the Government is supporting international efforts to ensure that counterparty risk be mitigated through bilateral collateralisation and risk-appropriate capital charges.
A footnote also highlights that the Government is also working with the Basel Committees review of counterparty risk exposure for CCPs, the Operations Management Group and the International Swaps and Derivatives Association to strengthen specific areas of bilateral collateralisation, in particular improving dispute resolution.
Whether more derivatives, once standardized, will be moved onto exchange has not been definitively addressed by either the UK or the US. The white paper only goes as far to say that standardised trades can be cleared on a CCP managing the risk of high volumes of non-standardised trades would be impractical
The white paper does add a veiled caveat that the legal status of CCPs is not covered by EU law and therefore the UK has its own recognition regime.
The full white paper can be found here.