FSB consults on OTC central clearing incentives
07 August 2018 Basel
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The Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commission (IOSCO) have published today a consultative document on Incentives to centrally clear over-the-counter (OTC) derivatives.
The central clearing of standardised OTC derivatives is a pillar of the G20 Leaders’ commitment to reform OTC derivatives markets in response to the global financial crisis.
A number of post-crisis reforms are, directly or indirectly, relevant to incentives to centrally clear. The FSB said the consultative document evaluates how these reforms interact and how they could affect incentives.
It added that the evaluation will inform relevant standard-setting bodies, and if warranted, could provide a basis for fine-tuning post-crisis reforms, bearing in mind the original objectives of the reforms.
This does not imply a scaling back of those reforms or an undermining of members’ commitment to implement them, said the FSB.
The evaluation is the second under the FSB framework for the post-implementation evaluation of the effects of G20 financial regulatory reforms.
It found that the changes observed in OTC derivatives markets are consistent with the G20 Leaders’ objective of promoting central clearing as part of mitigating systemic risk and making derivatives markets safer.
It also suggested that the relevant post-crisis reforms, in particular the capital, margin and clearing reforms, taken together, appear to create an overall incentive, at least for dealers and larger and more active clients, to centrally clear OTC derivatives.
Also, non-regulatory factors, such as market liquidity, counterparty credit risk management and netting efficiencies, are important and can interact with regulatory factors to affect incentives to centrally clear, while some categories of clients have less strong incentives to use central clearing, and may have a lower degree of access to central clearing. It noted that the provision of client clearing services is concentrated in a relatively small number of bank-affiliated clearing firms.
Some aspects of regulatory reform may not incentivise provision of client clearing services, said the FSB, adding that the analysis suggests that, overall, the reforms are achieving their goals of promoting central clearing, especially for the most systemic market participants.
This is consistent with the goal of reducing complexity and improving transparency and standardisation in the OTC derivatives markets, it said. Beyond the systemic core of the derivatives network of central counterparties (CCPs), dealers/clearing service providers and larger, more active clients, the incentives are less strong.
The FSB noted that analysis of quantitative and qualitative survey data and market outreach suggests that the treatment of initial margin in the leverage ratio can be a disincentive for banks to offer or expand client clearing services.
Bearing in mind the original objectives of the reform, additional analysis would be useful to further assess these effects, it added.
The FSB said that the four principal entities involved in the consultation welcome responses to the questions set out in this consultative document by Friday 7 September 2018. Responses should be sent to fsb@fsb.org.
Responses will be published on the FSB website unless respondents expressly request otherwise. The final report will be published at around the time of the G20 Summit at end-November 2018, the FSB finished by saying.
The central clearing of standardised OTC derivatives is a pillar of the G20 Leaders’ commitment to reform OTC derivatives markets in response to the global financial crisis.
A number of post-crisis reforms are, directly or indirectly, relevant to incentives to centrally clear. The FSB said the consultative document evaluates how these reforms interact and how they could affect incentives.
It added that the evaluation will inform relevant standard-setting bodies, and if warranted, could provide a basis for fine-tuning post-crisis reforms, bearing in mind the original objectives of the reforms.
This does not imply a scaling back of those reforms or an undermining of members’ commitment to implement them, said the FSB.
The evaluation is the second under the FSB framework for the post-implementation evaluation of the effects of G20 financial regulatory reforms.
It found that the changes observed in OTC derivatives markets are consistent with the G20 Leaders’ objective of promoting central clearing as part of mitigating systemic risk and making derivatives markets safer.
It also suggested that the relevant post-crisis reforms, in particular the capital, margin and clearing reforms, taken together, appear to create an overall incentive, at least for dealers and larger and more active clients, to centrally clear OTC derivatives.
Also, non-regulatory factors, such as market liquidity, counterparty credit risk management and netting efficiencies, are important and can interact with regulatory factors to affect incentives to centrally clear, while some categories of clients have less strong incentives to use central clearing, and may have a lower degree of access to central clearing. It noted that the provision of client clearing services is concentrated in a relatively small number of bank-affiliated clearing firms.
Some aspects of regulatory reform may not incentivise provision of client clearing services, said the FSB, adding that the analysis suggests that, overall, the reforms are achieving their goals of promoting central clearing, especially for the most systemic market participants.
This is consistent with the goal of reducing complexity and improving transparency and standardisation in the OTC derivatives markets, it said. Beyond the systemic core of the derivatives network of central counterparties (CCPs), dealers/clearing service providers and larger, more active clients, the incentives are less strong.
The FSB noted that analysis of quantitative and qualitative survey data and market outreach suggests that the treatment of initial margin in the leverage ratio can be a disincentive for banks to offer or expand client clearing services.
Bearing in mind the original objectives of the reform, additional analysis would be useful to further assess these effects, it added.
The FSB said that the four principal entities involved in the consultation welcome responses to the questions set out in this consultative document by Friday 7 September 2018. Responses should be sent to fsb@fsb.org.
Responses will be published on the FSB website unless respondents expressly request otherwise. The final report will be published at around the time of the G20 Summit at end-November 2018, the FSB finished by saying.
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