FSB, BCBS, CPMI and IOSCO consultative document suggests some aspects of regulatory reform may not incentivise provision of client clearing services; 80% of total client margin for cleared OTC derivatives in the US, UK and Japan is concentrated at just 5 bank-affiliated firms.
The FSB (Financial Stability Board), the BCBS (Basel Committee on Banking Supervision), the CPMI (Committee on Payments and Market Infrastructures) and IOSCO (the International Organization of Securities Commissions) have published a consultative document to examine whether adequate incentives to centrally clear OTC derivatives are in place.
The evaluation, which follows a 2014 assessment of the same, found that changes observed in OTC derivatives markets are consistent with the G20 objective of promoting central clearing as part of mitigating systemic risk and making derivatives markets safer.
“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,” especially for the most systemic market participants, said a press statement. This is consistent with the G20 goal of reducing complexity and improving transparency and standardisation in the OTC derivatives markets.
However, some aspects of regulatory reform may not incentivise provision of client clearing services, particularly beyond the systemic core of the derivatives network of CCPs, dealers/clearing service providers and larger, more active clients.
Other categories of clients may have a lower degree of access to central clearing, with the provision of client clearing services being concentrated in a relatively small number of bank-affiliated clearing firms. For example, five firms – all bank-affiliated – account for over 80 percent of total client margin for cleared OTC derivatives in the US, UK and Japan. Although the overall amount of client margin posted at CCPs has increased substantially since the implementation of reforms, the number of clearing service providers has stayed broadly flat over the same period.
According to the consultative document, some aspects of regulatory reform may not incentivise banks to offer or expand client clearing services, such as the treatment of initial margin in the leverage ratio. “Bearing in mind the original objectives of the reform, additional analysis would be useful to further assess these effects,” it says.
This evaluation will inform relevant standard-setting bodies and could provide a basis for fine-tuning post-crisis reforms, however it does not imply a scaling back of reforms or an undermining of members’ commitment to implement them.
The FSB, BCBS, CPMI and IOSCO welcome responses to the questions set out in the consultative document by 7 September 2018.
A final report will be published at the end of November, around the time of the G20 Summit.