By Central Bank News
United States, Europe and Japan are on track to have all standardized over-the-counter (OTC) derivative contracts traded on exchanges and cleared through central counter parties by end-2012, meeting a deadline set by Group of 20 leaders, the Financial Stability Board said.
The global financial crises revealed that OTC derivatives had contributed to a build-up of systemic risk, triggering fears of contagion due to the close ties between market participants and a lack of transparency of their relationships.
G20 leaders have repeatedly committed themselves to improve the transparency and regulatory oversight of OTC derivatives and asked the FSB – which coordinates international financial regulation – to keep track of the reform efforts to make sure there are no loopholes and overlapping regulations.
In its third progress report, the FSB said encouraging progress had been made in setting international standards and implementing the reforms,, with the largest OTC derivative markets expected to have frameworks in place by end-2012 and that practical implementation was well underway.
Other jurisdictions, however, are less advanced in their reform efforts, partially because they are waiting for elements of the regulatory frameworks in the EU, Japan and the US to be finalised before putting their own legislation in place, so their rules are consistent with the top markets, the FSB said.
“Full and consistent implementation by all FSB members is important to reduce systemic risk and the risk of regulatory arbitrage that could arise if there are significant gaps in implementation,” FSB said, calling on all jurisdictions, including Hong Kong, Korea, South Africa, Australia, Mexico, Singapore and Switzerland to put in place needed legislation and regulation.
“The OTC derivatives markets are already global markets, in which market participants can easily redirect their activities to other jurisdictions to take advantage of regulatory arbitrage if jurisdictions have not fully and consistently implemented the measures,” it added.
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