Global securities regulators are proposing a set of new standards designed to mitigate the risks that arise from over-the-counter (OTC) derivatives that cannot be centrally cleared.
The International Organization of Securities Commissions (IOSCO) published a consultation paper Wednesday that proposes nine standards aimed at mitigating the risks of non-centrally cleared OTC derivatives. The report explains that one of the primary reforms introduced in the wake of the financial crisis is to encourage the central clearing of standardized OTC derivatives. However, it notes that many OTC derivatives are not standardized, and therefore they are not suitable for central clearing. For these sorts of instruments then, IOSCO is proposing a set of standards designed to: promote legal certainty and timely dispute resolution; facilitate the management of counterparty credit and other risks; and, increase overall financial stability.
The proposed standards, which were developed in consultation with the Basel Committee on Banking Supervision (BCBS) and the Committee on Payments and Market Infrastructures (CPMI), are designed to complement the margin requirements for non-centrally cleared derivatives that were developed by the Basel Committee and IOSCO in September 2013.
"Alongside margin, a number of other techniques may contribute to reducing the risks in the non-centrally cleared OTC derivatives market. These other techniques include documentation, confirmation, portfolio reconciliation and compression, valuation, and dispute resolution," the report says, noting that some jurisdictions have proposed regulatory requirements in these areas, and that others are considering the introduction of these sorts of requirements.
Comments on the proposals are due October 17.