Its commitments included early deadlines for recording credit and interest rate derivatives to trade repositories, and the expansion of central clearing to include single-name credit default swaps (CDSs) and overnight index swaps (OISs).
In its latest letter to the Federal Reserve Bank of New York, seven other US regulators and four international supervisors, the OMG (consisting of 27 broker-dealers, buy-side firms and industry associations) committed to record all credit derivatives trades not cleared through central counterparties (CCPs) to trade repositories by July 17. It also stated its objective to record all interest rate derivatives by December 31 and equity derivatives by July 31, 2010.
The OMG urged non-signatories to the letter to meet the same goals within 60 days of the specified dates.
Central clearing of OTC derivatives, one of the main focuses of market participants and regulators in the past year, was unsurprisingly at the core of the OMG’s commitments. Its goal is for buy-side firms to have access to CDS clearing platforms – either via direct CCP membership or their dealers – no later than December 15.
However, highlighting that the move towards central clearing for CDSs has been anything but straightforward, there was a caveat. A joint buy-side and sell-side group is due to submit legal and regulatory analysis of how best to achieve buy-side access to regulators by the end of June. “If through the analysis we determine that regulatory and/or legislative changes are required to accomplish buy-side access to CDS clearing, we will seek assistance from supervisors,” the OMG wrote.
Additionally, OMG members committed to expand clearing of CDSs from index products to include liquid single-name CDSs this year (while not defining what liquid means in this context) and tranche trades in 2010. On the interest rates side, overnight index swaps will be cleared by the end of the year.
Collateral management has also seen its stock rise during the financial crisis, and several targets in this area were set out in the Fed letter. The OMG committed to daily reconciliation of all collateralised inter-dealer portfolios (in excess of 500 trades) by the end of June. According to the group, this means that, since October 31, when collateral management targets were set by the OMG for the first time, the industry will have moved from a state with no defined standard for portfolio reconciliation to one where 70% of outstanding trades are reconciled regularly. Also, market participants will publish a standard mechanism for resolving collateral disputes by the end of September.
Several regulatory bodies, including the New York Fed, have expressed concerns that dealers have too much control over the infrastructure of the derivatives business. Consequently, the OMG made commitments to ensure a broad range of market participants will be included in decision-making processes, including changing the make-up of market committees.
The OMG’s membership has been expanded since the last Fed letter to reflect this: then, it consisted of 16 dealers plus the International Swaps and Derivatives Association, the Managed Funds Association and the Securities Industry and Markets Association. Now it is made up of 15 dealers (one less due to the merger of Bank of America and Merrill Lynch), the three industry bodies and nine buy-side firms.
There were also a number of asset class-specific commitments. In the credit space, for example, the OMG set a target of 90% T+0 submission for all electronically eligible transactions by December 31. By September 30, all electronically eligible new trades and novations must be confirmed on electronic platforms. The industry also signalled its intention to bring an end to the two-step process of consent followed by confirmation for novations. By June 30, the OMG will release a plan and implementation schedule to change the process so that a consent will represent a valid legal confirm.
The equity derivatives market has traditionally lagged behind in terms of operations targets, principally due to it being the least-standardised asset class. The OMG committed to increase the percentage of trade matching on electronic platforms to 50% by December 31, and to have electronic matching of electronically eligible trades totalling 80% for the interdealer market and 50% in the dealer-client market by the same date. It also committed to reduce outstanding confirmations for trades older than 30 days to less than 1.5 business days by October 31.
The OMG's report will no doubt please regulators, especially those in the US, where Treasury secretary Tim Geithner first called for the central clearing of all standardised OTC derivatives and the reporting of all customised trades with trade repositories in late March.
One source of disappointment for Geithner might have been the OMG's failure to report plans to move appropriate standardised contracts onto traded exchanges, a move he has advocated.
"The International Swaps and Derivatives Association (Isda) and the industry remain committed to increasing operational efficiency and reducing the sources of risk in the privately negotiated derivatives business," said Robert Pickel, chief executive officer at Isda in New York. "We have made substantial progress in a short period of time and intend to maintain this strong positive momentum."
Geithner's successor as president of the New York Fed, William Dudley, also welcomed the OMG letter while noting more work needs to be done before regulators will be satisfied. "The OTC derivatives market has been exposed as a source of excessive risk. Achieving these commitments is an important step towards managing that risk, making the financial system more resilient and robust. We will continue to demand further improvements until our objectives are achieved," he said.
See also: Geithner: US will "force all standardised OTC derivatives into central clearing"
Geithner calls for law change to force OTC derivatives clearing
Geithner outlines regulations for over-the-counter market
OTC trade repository plan faces hurdles
The week on Risk.net, July 7-13, 2018Receive this by email