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Progress on making OTC derivatives market safer is limited, says FSB

International progress toward further reforming the over-the-counter derivatives market in the wake of the financial crisis has been limited, according to the Financial Stability Board.

The FSB is charged with overseeing reforms agreed to by the G-20 group of nations aimed at making the OTC derivatives markets safer. In the wake of the financial crisis, global regulators aimed to improve transparency in the market and limit excessive and opaque risk-taking. OTC derivatives are usually traded through a network of dealers rather than through a centralized exchange which would reduce risk.

The latest report looks at progress made between the end of November 2018 and the end of September 2019.

Trade reporting requirements

During that time only South Africa remained without comprehensive trade reporting requirements in force, out of the 24 member jurisdictions examined.

The rules on trade reporting are aimed at boosting the quality and availability of data, with the volume and price of trades required to be published swiftly. During the period under consideration, a number of jurisdictions launched initiatives aimed at streamlining trade reporting, including the European Union and the U.S.

The report showed that 18 jurisdictions have comprehensive criteria in place for assessing when OTC derivatives should be centrally cleared, while in some of these areas a wider range of products are now subject to mandatory clearing.

Comprehensive margin requirements for OTC derivatives are in force in 16 jurisdictions, an increase of just one during the reporting period, the FSB said. Estimated collateralization rates are available in 10 of those 16 jurisdictions.

The survey also showed that only seven jurisdictions had implemented the final capital requirements, or risk buffers, for non-centrally cleared derivatives, and these were due to have been implemented by January 2017. However, interim capital requirements are in force in 23 out of 24 jurisdictions.

Comprehensive platform requirements for OTC derivatives trading, which includes the legal framework, are in force in 13 jurisdictions, a number that remained unchanged during the reporting period.

Legal entity identifiers, deference

There was progress in the use of legal entity identifiers in OTC derivatives trade reporting, said the FSB. It said once authorities in Hong Kong had introduced the use of legal entity identifiers in April, 94% of total outstanding transactions have been reported with these as the identifier of the reporting entity's side of the transaction.

Finally, just one jurisdiction started exercising deference during the reporting period, when regulators defer to each other's regulatory regimes while paying due respect to each other's home regulations. Several other jurisdictions that already exercised deference in the past extended it to further jurisdictions.

Of all the areas under consideration, only Australia had comprehensive standards in place for all the measures assessed, from trade reporting requirements to rules on platform trading.