In a bid to curb the systemic risk posed by over-the-counter (OTC) derivatives, global securities regulators are adopting a new set of standards for OTC derivatives that are not centrally cleared.

The International Organization of Securities Commissions (IOSCO) Wednesday published a final report that sets out nine standards aimed at mitigating the risks in the non-centrally cleared OTC derivatives markets.

In the wake of the financial crisis, regulators have sought to encourage central clearing in the OTC derivatives markets. However, given that many OTC derivatives are not suitable for central clearing, regulators are proposing standards designed to: encourage the adoption of sound risk mitigation techniques; promote legal certainty over the terms of the non-centrally cleared OTC derivatives transactions; foster effective management of counterparty credit risk; and to facilitate timely resolution of disputes.

The risk mitigation standards cover trading relationship documentation and trade confirmation; valuation methodologies; and, portfolio reconciliation and compression. The standards were developed by IOSCO in consultation with the Basel Committee on Banking Supervision and the Committee on Payments and Market Infrastructures.

IOSCO and the Basel Committee have also established minimum standards on margin requirements for non-centrally cleared OTC derivatives.

“The risk mitigation standards, along with the margin requirements, will help market participants better manage risks in transacting in non-centrally cleared OTC derivatives and improve the resilience of the non-centrally cleared OTC derivatives market,” said Lee Boon Ngiap, chair of the IOSCO working group that developed the standards, and assistant managing director of the Monetary Authority of Singapore.