Hardly any jurisdictions look set to meet the G-20 deadline for implementing legislation and regulation for the over-the-counter derivatives market, according to a report by the Financial Stability Board.
The regulatory body found most jurisdictions had fallen behind schedule in a number of areas, including such cornerstones of the regulatory reform as central clearing and exchange or electronic trading of standardised derivatives.
The FSB also identified several areas where overlaps, gaps or conflicts in different jurisdictions’ regulatory frameworks could undermine the G20’s objectives in reducing systemic risk.
“With only just over one year until the end-2012 deadline for implementing the G-20 commitments, few FSB members have the legislation or regulations in place to provide the framework for operationalising the commitments,” the report stated.
“This report concludes that jurisdictions should aggressively push forward to meet the end-2012 deadline in as many reform areas as possible.”
The FSB highlighted that only the US and Japan had adopted legislation mandating the clearing of OTC derivatives through central counterparties, with the European Union expecting legislation to be adopted by year-end.
While noting many jurisdictions are likely waiting for US and EU regulation to be finalised, the FSB judged “the target of having all standardised derivatives contracts centrally cleared will not be fully met by end-2012 in all FSB member jurisdictions”.
However, the report acknowledged central clearing of OTC derivatives has progressed both in terms of higher volumes and expanded products, particularly within rates and credit. According to FSB estimates, 34% of interest rate derivatives and 11% of credit default swaps are now centrally cleared.
With respect to exchange and electronic trading of standardised OTC derivatives, the FSB noted implementation of regulatory frameworks is “markedly behind progress”, with only the US having adopted legislation to this effect.
The report also highlighted several potential issues concerning implementation of the reforms. There is some evidence that various jurisdictions may not mandate central clearing of standardised contracts that have moved on to organised platforms – a move that would be contrary to the text of the G-20 statement and would create an opportunity for regulatory arbitrage, according to the FSB.
More generally, the report noted several potential inconsistencies between jurisdictions with regard to central clearing. For instance, it predicted potential overlaps or conflicting in regulation of central counterparties, as well as divergence in opinions of where CCPs should be located – an issue that was recently highlighted with the UK government taking legal action against the ECB over plans to force CCPs that handle more than 5% of a euro-denominated market to be based in the eurozone.
The FSB also drew attention to inconsistencies in what instruments will be subject to clearing in different jurisdictions. For instance, the US has exempt FX swaps and forwards from clearing, while the EU has exempt intra-group trades, and has also provided a carve-out for certain end-users such as pension schemes and sovereigns and agencies.
Elsewhere, the report noted several issues remained with reporting of trades to trade repositories, such as the suitability of data collected by repositories for satisfying regulatory standards and effective access for regulators to the data. However, the FSB stated progress had been made in presorting trades to repositories in rates, credit and equity derivatives asset classes.
Standardisation of derivatives contracts was also judged to have moved forward, with most jurisdictions reckoning that the proportion of standardised OTC derivatives will have “substantially increased” by the end of 2012 from pre-2009 levels.