Regulators are poised to reform over-the-counter derivative markets. Firms may be obliged to use central counterparties to clear standard contracts, and to report all trades to an official repository. Kevin Samborn, director at Boston-based consulting firm Sapient, warns that firms will need to do a lot of work on their IT systems to comply.
Following the collapse of Lehman Brothers and the
near-failure of AIG, financial authorities in the USA, Europe
and Asia are planning overhauls of the regulatory framework
surrounding the OTC derivative markets.
Proposals put forward by the US Treasury include having
standardised OTC contracts cleared by central counterparties
(CCPs), moving such contracts to regulated exchanges, and
compulsory reporting of all derivatives transactions, both
standardised and customised, to a trade repository.
The European Commission has made it clear that it, too,
intends to encourage greater standardisation to facilitate
centralised clearing and, ultimately, exchange trading of OTC
contracts. Asian authorities are planning similar moves.
The authorities are still discussing the details of
forthcoming regulations. One of the most important concepts in
their proposals is the need to standardise product definitions
– something that is itself subject to continued
Indeed, no full definition of what constitutes a
standardised contract has been set out, although Mary Schapiro,
chairman of the US Securities and Exchange Commission, has
said: "There should be a presumption that if an instrument is
accepted for clearing by a fully regulated clearing house, then
it should be required to be cleared."
Despite some lack of clarity around certain aspects of the
financial authorities’ plans, the general
direction regulation looks set to take is clear. It is also
increasingly apparent that banks will need to enhance their IT
systems and rethink business processes to cope with these
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