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14 April 2015

Euractiv: Regulators warn over-the-counter derivatives are out of control

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OTC trading is done between two parties, without supervision of a stock exchange. These facilitate liquidity, help mitigate risk, provide transparency and maintain a current market price. In an OTC trade, the price is not necessarily available to the public.

EU and US industry and regulatory figures have warned that the number and nature of repositories listing over-the-counter derivatives trades is threatening to blind regulators to market risk.

“To meet the G20 objective, The Depository Trust & Clearing Corporation (DTCC) [a US-headquartered global post-trade services provider] suggested the optimal model would be to establish one trade repository per asset class, providing a centralised point of access for regulators around the world,” said Larry Thompson, the DTCC’s vice chairman and general counsel said. “But what has happened, unfortunately, is that instead of one trade repository per asset class, 25 trade repositories have sprung up around the world,” Thompson said. “We’ve always said that trade repositories and their data should not be used for commercial purposes. Data should be collected and shared for public good, aiding market transparency and reducing risk,” the lawyer warned.

David Wright, the Secretary General of the International Organization of Securities Commissions (IOSCO), the global standard setter for the securities sector which works with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda, echoed Thompson’s warned. “Well we’ve got 25 of these beasts [repositories] today and they don’t talk to each other, so a basic fundamental trawl of transparency is actually missing, and we in IOSCO have a role to get this done. We need standard product and legal identifier(s), but this [current situation] is not a good thing,” said Wright a former deputy director-general for securities and financial markets with the EU executive.

“We agree with David Wright that there needs to be some rationalisation of the market in order to achieve the transparency goals set out by the G20,” said Thompson. Their warnings were underlined by Elke König, the chair of the new European Single Resolution Board. “I think we have some areas where the regulators must do a better job. One of those is OTC derivatives reform, where we have a lot of competition going on and we have to sort that out,” König told the same conference.

“If regulators do not have access to a consistent data set across jurisdictions and are prevented from accessing data due to legal barriers that limit data sharing, it becomes impossible to monitor international exposure of derivatives and compare risk across borders,” Thompson warned.

Full article on Euractiv

Interview with Larry Thompson


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