Over-the-counter (OTC) derivatives are financial instruments typically negotiated bilaterally between counterparties rather than highly standardised and traded on traditional exchanges.With the global market for these instruments having grown very rapidly in recent decades, the need for market reforms had been building even prior to the financial crisis events of 2007–2008. Large volumes of outstanding bilateral transactions had created a complex and deeply interdependent network of exposures that ultimately contributed to a build-up of systemic risk. The stresses of the crisis exposed these risks: insufficient transparency regarding counterparty exposures; inadequate collateralisation practices; cumbersome operational processes; uncoordinated default management arrangements; and market misconduct concerns.

In response, the G20 Leaders agreed in 2009 to a comprehensive reform agenda for these markets, with the objectives of improving transparency, mitigating systemic risk, and protecting against market abuse.

To achieve these objectives, the G20 has agreed that:

  • all OTC derivatives contracts should be reported to trade repositories (TRs);
  • all standardised contracts should be cleared through central counterparties (CCPs);
  • all standardised contracts should be traded on exchanges or electronic trading platforms, where appropriate;
  • non-centrally cleared (bilateral) contracts should be subject to higher capital requirements and minimum margining requirements.

Implementing these reforms has required significant changes to FSB member jurisdictions’ regulatory regimes. In many cases new legislative frameworks have needed to be designed and implemented, followed by detailed rules and regulations to give effect to reforms.

Supporting these national efforts, international standard-setting bodies have reviewed or developed standards to be applied in relation to financial market infrastructure and market participants.

The FSB has been monitoring national reform efforts, and regularly reporting on progress towards the G20’s commitments and objectives. As well, it has worked with the standard-setting bodies to ensure that necessary international work is taking place as needed, and coordinating across groups where appropriate.