In response to the EC's July report (Ensuring efficient, safe and sound derivatives markets), which closed for comment on August 31, the International Swaps and Derivatives Association, the Securities Industry and Financial Markets Association and the London Investment Banking Association said they welcomed many of the proposed improvements in market infrastructure.
The EC's main proposals were a requirement for standardised derivatives contracts to be cleared through central counterparties (CCPs), with non-standardised contracts reported to a central repository. The EC also said it would encourage greater use of regulated exchanges and trading venues.
While they supported most of the proposals, the associations came out strongly against imposing penalties on contracts that are not centrally cleared. Existing capital charges are already an incentive for market participants to use a central clearing house, they said. "Additionally, while there are benefits from having CCPs in privately negotiated derivatives markets, the associations believe there are also strong reasons for not clearing all trades."
Regulatory focus "should be on process uniformity, not product uniformity", Isda's chief executive, Robert Pickel, explained. "Exchange trading is not required to achieve this and it certainly would not insulate our financial system from risk or reduce losses in a challenging environment."
Despite these complaints, the bodies offered their support for the collateralisation of interdealer OTC trades, stressing the quality of posted collateral and the speed with which it could be liquidated in a default should be the main focus. However, further legislation is required to address legal uncertainty for close-out netting and collateral arrangements, they said.
A central data repository, could, in principle, be "relevant for systemic participants in all asset classes", the associations noted. But its use must not restrict the flow of new products to the market and must "fully respect the global basis on which these products trade".
Pickel also emphasised the need for close global co-operation, and said the EC should recognise that "hastily implemented solutions, whether voluntary or imposed, could be counterproductive". The EC will discuss the responses to its proposals at a conference in Brussels on 25 September.
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