FSB Sees Derivatives Reform Progress: But More Needed

The Financial Stability Board (FSB) has published three
reports looking at the ongoing derivatives markets reform process and while the
news is broadly positive the FSB says there is still more progress needed on
trade repositories (TRs).

A summary of the papers will be delivered to the G20 heads
at the upcoming Hamburg meeting – the reform process started in September 2009
at the Pittsburgh G20 summit.

The latest reports find that implementation
of the reforms is now well progressed, although this has taken longer than
originally intended due to the scale and complexity of the reforms and other
challenges. Implementation is still ongoing and is generally most advanced in
the largest OTC derivatives markets.

Specifically, meaningful
progress has been made toward mitigating systemic risk especially through
central clearing which, the paper says, has increased markedly in interest rate
derivatives and, to a lesser extent, credit default swaps. “This is simplifying
much of the previously complex and opaque web of derivatives exposures, and the
central counterparties supporting that clearing are more resilient.” The FSB
says. “In addition, more collateral is in place to reduce counterparty credit
risks within the system.”

The FSB is concerned about progress around TRs, however,
noting that while authorities also report progress in improving transparency –
with a number of them using data from trade repositories, “significant
challenges remain”.

To the extent implemented, platform trading has also
improved transparency to market participants, the FSB says, but it adds that it
is important to complete work quickly to improve the quality of, and ability to
aggregate, TR data including by removing legal barriers to the full reporting
and sharing of such data.

The report says that further study is also needed on the
effects of the reforms in protecting against market abuse. “There is limited
evidence on this at present, although some authorities report using TR data for
market surveillance purposes,” it says.

FSB member
jurisdictions are following a plan to address legal barriers to reporting and
accessing trade data ahead of the end-June 2018 deadline, however while
it
describes a number of significant actions taken by authorities of the EU,
France, Singapore and the US in the last year to address barriers, major gaps
and issues remain to be addressed across the FSB membership. “It is essential
that FSB member jurisdictions address the remaining issues by the committed
deadlines in 2018,” it states.

As part of the process the FSB also issues consultation
papers and it says a range of views have been expressed on the impact of market
reforms on spreads and liquidity in OTC derivatives markets. “There is some
evidence that the reforms have improved liquidity in some OTC derivatives
markets, although some authorities have concerns that the interaction of the
broader set of post-crisis reforms may have contributed to a reduction in the
depth of liquidity,” the FSB says. “In addition, cross-border cooperation,
including over the timing of implementation, is important to help reduce
market fragmentation.”

The FSB also notes that since it last reported, the number
of FSB member jurisdictions with comprehensive margining requirements for
non-centrally cleared derivatives (NCCDs) increased by 11 to a total of 14. “However,
10 jurisdictions still do not have margin requirements in force in accordance
with the internationally agreed implementation schedule for these reforms, and
these jurisdictions should urgently take steps to implement these reforms,” it
warns.

Comprehensive trade reporting requirements for OTC
derivatives and higher interim capital requirements for NCCDs are now mostly in
force across member jurisdictions. “Since June 2016, progress continued, albeit
at a slower pace, in implementing central clearing frameworks, final capital
requirements for NCCDs, and platform trading requirements. The number of CCPs
available to clear OTC derivatives increased to 32, and cross-border
availability of CCPs has also increased. Authorisation of new trade
repositories also continued,” FSB says.

Bank of England governor Mark Carney, who is also chair
of the FSB, says, “Reforms to OTC derivative markets are replacing a complex
and dangerous web of exposures with a more transparent and robust system that
better serves the real economy. Global banks now hold over $800 billion more
collateral against their OTC derivative counterparty exposures, and the
coverage of exposures by collateral has doubled to nearly two-thirds. More
resilient central counterparties are reducing the risk of contagion to the
banking sector from the failure of individual institutions. FSB jurisdictions
need to do more, however, to address remaining legal barriers which are
preventing authorities from fully realising the benefits of trade reporting.”

Colin_lambert@profit-loss.com

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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