Global financial regulators are examining the outcome of reform efforts to shore up the over-the-counter (OTC) derivatives markets in the wake of the global financial crisis.
Global policymakers developed reforms designed to improve financial stability by encouraging more central clearing in the OTC derivatives market in response to the crisis. Now, a collection of regulatory policy groups and standards setters — including the Financial Stability Board, the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions — has launched a consultation on the efficacy of those reform efforts.
Overall, the group has published a consultative document, which concludes that the reforms are encouraging central clearing, particularly for market participants that are most systemically significant, as well as reducing complexity and improving transparency and standardization in the OTC derivatives markets.
The regulators’ initial evaluation finds that certain post-crisis reforms, in particular the capital, margin, and clearing reforms, “appear to create an overall incentive, at least for dealers and larger and more active clients, to clear OTC derivatives centrally.”
The report also notes that OTC derivatives markets have evolved in line with the G20’s objective of promoting central clearing in a bid to curb systemic risk and make derivatives markets safer.
In addition, the report notes that other factors, such as market liquidity and risk-management efforts, can interact with regulatory factors to affect incentives for central clearing and that some aspects of the reforms may not incentivize client clearing services.
For example, the report says that the “treatment of initial margin in the leverage ratio can be a disincentive for banks to offer or expand client clearing services.”
Responses to the consultation are due Sept. 7, with a final report expected by the end of November. The feedback may lead to a fine-tuning of the reforms, the regulators say, adding that this does not imply that the reforms will be scaled back.