Dealers say they have little appetite for voluntary change when facing big mandatory reforms The largest 14 derivatives dealers have agreed a modest set of new voluntary commitments to standardise the over-the-counter market in their annual letter to regulators, as the industry focuses on the daunting task of complying with compulsory market reforms. "These commitments were made in the knowledge that a very short distance down the road we will have to begin implementing the Dodd-Frank Act. I realise that is primarily a concern for US firms, but this year's commitment process is trying to create a glide-path between where we are now and where we need to be under the new legislation. Dodd-Frank definitely looms large over this process and it has been a significant determinant in the ambition of this set of commitments," says one New York-based dealer party to the industry's discussions with the Over-the-Counter Derivatives Supervisors Group (ODSG), which is made up of central banks, regulators and government bodies. In the letter, published on Tuesday, signatories commit to process 85% of electronically eligible confirmations on an electronic platform by September 30, a 5% improvement on the 80% electronic confirmation target set in last year's letter. The same 5% increase is carried across to other asset classes, although some products – especially those that already have high rates of confirmation – have had targets increased by as little as a single percentage point, with some seeing no mandated increase at all. The March 2010 letter committed G-14 dealers to process 95% of electronically eligible confirmable events on electronic platforms by December 31, 2010 but as this target was met, the signatories propose no further increase – for now, at least. Conversely, electronic confirmation quotas for interest rate derivative trades transacted with all other market participants have been raised from a target of 60% set last year to 75% by September 30 this year. Less clarity exists around how access to central clearing will be extended to derivatives end-users. William Dudley, president of the Federal Reserve Bank of New York, singled this issue out as a particular concern at a meeting of the ODSG on January 26, telling dealers industry progress had met "the letter but not the spirit of the law". He reiterated that sentiment in a statement welcoming the new industry commitments, while outlining the regulators' response – a new working group to speed up the progress of client clearing. "The industry did not meet its prior commitment to provide a viable clearing solution for clients. For this reason, a working group, co-ordinated by supervisors and involving a balanced representation of stakeholders, will work through these issues to their resolution," said Dudley in the statement. In the 2011 letter the signatories "commit to participating with the supervisors and the relevant central clearing platforms in a series of focused discussions on the key issues/obstacles to expansion of central clearing" to end-users. This discussion process will set milestones to help resolve issues such as legal documentation, the challenges of on-boarding clients to clearing houses and the treatment of end-user collateral, the letter says. "The latest commitments are very much in the continuity of the existing process. Rather than striking out in fundamentally new directions, it's more a matter of taking existing commitments further, expanding the range of standardisation, of clearing and of bilateral risk management," says Eric Litvack, chief operating officer of global equity flow at Société Générale Corporate and Investment Banking in Paris. "Each successive step gets more challenging though, because the investments required to reach successive milestones are greater. In addition, as we reach into lower-volume pockets of the market where we find either less-active products or less-active clients, the marginal returns may be diminishing. Nevertheless it's important to maintain the forward momentum here, both because it moves the industry closer in line with the broader set of regulatory requirements and because it challenges us to deliver safer, more efficient OTC markets," he adds....
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