– While the long-term economic effects of the reforms remain difficult to assess, progress has been made toward meeting the G20 objectives. Meaningful progress has been made toward mitigating systemic risk. Central clearing is simplifying much of the previously complex and opaque web of derivatives exposures, and central counterparties (CCPs) are more resilient. In addition, more collateral is in place in the system. There is progress in improving transparency through use of trade repositories (TRs) and platform trading. International work is taking place to improve the resilience, recovery planning and resolvability of CCPs; improve data quality and remove legal barriers to reporting and accessing TR data; and evaluate the interaction of reforms on incentives to clear OTC derivatives centrally.
In more detail, the review of OTC derivatives market reforms
- Implementation of the reforms is now well progressed, although this has taken longer than originally intended due to the scale and complexity of the reforms and other challenges. Implementation is still ongoing and is generally most advanced in the largest OTC derivatives markets. Further effort will be required to finish the job.
- Meaningful progress has been made toward mitigating systemic risk. Specifically, central clearing (which has increased markedly in interest rate derivatives and, to a lesser extent, credit default swaps) is simplifying much of the previously complex and opaque web of derivatives exposures, and the central counterparties supporting that clearing are more resilient. In addition, more collateral is in place to reduce counterparty credit risks within the system.
- Authorities also report progress in improving transparency – with a number of authorities using data from trade repositories (TRs), including to better monitor risk. To the extent implemented, platform trading has also improved transparency to market participants. However, significant challenges remain and it is important to complete work quickly to improve the quality of, and ability to aggregate, TR data including by removing legal barriers to the full reporting and sharing of such data.
- Further study should be made of the effects of the reforms in protecting against market abuse. There is limited evidence on this at present, although some authorities report using TR data for market surveillance purposes.
- A range of views have been expressed on the impact of market reforms on spreads and liquidity in OTC derivatives markets. There is some evidence that the reforms have improved liquidity in some OTC derivatives markets, although some authorities have concerns that the interaction of the broader set of post-crisis reforms may have contributed to a reduction in the depth of liquidity.
- In addition, cross-border cooperation, including over the timing of implementation, is important to help reduce market fragmentation.
Below is an extract from the G20 report on the implementation of OTC derivatives market reforms.
Implementation of OTC derivatives reforms continues, particularly in the largest OTC derivatives markets, but it remains behind schedule in some jurisdictions (Graph 7).
1 For the purposes of this section, “comprehensive” means that the standards, criteria or requirements apply to over 90% of OTC derivatives transactions as estimated by that jurisdiction. In the case of margin requirements, “comprehensive” means that the standards, criteria or requirements in force in a jurisdiction would have to apply to over 90% of transactions covered, consistent with the BCBS–IOSCO Working Group on Margin Requirements phase in periods. See the FSB report on OTC Derivatives Markets Reforms: Twelfth Progress Report on Implementation.↩
- Overall, implementation is most advanced for trade reporting and for the interim higher capital requirements for non-centrally cleared derivatives, although progress in implementing the final capital requirements is much less. Comprehensive1 central clearing frameworks have been implemented in almost three-quarters of jurisdictions and comprehensive margin requirements, as well as comprehensive platform trading frameworks, have been adopted in about half.
- There has been progress since last year in implementing comprehensive margin requirements for non-centrally cleared derivatives (eleven more jurisdictions than last year) as well as adopting comprehensive standards for determining when OTC derivatives are standardised and should be required to be centrally cleared (three more jurisdictions) and be subject to platform trading (one more jurisdiction).
- Seventeen jurisdictions have comprehensive central clearing frameworks in force for determining when OTC derivatives are standardised and should be required to be centrally cleared. Based on those frameworks, 11 jurisdictions have requirements in force for specific products to be centrally cleared, mostly for interest rate derivatives.
- Fourteen jurisdictions have comprehensive margin requirements for non-centrally cleared derivatives. Of the remaining jurisdictions, one (China) has not initiated reform in this area.
- Comprehensive trade reporting requirements are in force in 19 jurisdictions. By end-2017, all but one jurisdiction expect to have such requirements in force.
- Twelve jurisdictions have frameworks for determining mandatory platform trading requirements for standardised OTC derivatives that apply to over 90% of their markets. Based on those frameworks, six jurisdictions have determinations in force for specific products to be executed on organised trading platforms.