On 28th January 2015 the International Organization of Securities Commissions (IOSCO) published a final report highlighting the risk mitigation standards for non-centrally cleared OTC derivatives that industry participants need to comply with. The standards were developed in conjunction with the Basel Committee on Banking Supervision (BCBS) and should be considered alongside the standards on margin requirements released by IOSCO and BCBS in September 2013, both intended to promote legal certainty, manage risk and strengthen the non-centrally cleared OTC derivative market.
Are the standards new?
No. The standards cover the same 5 areas the industry have been implementing as part of the G20 OTC derivative legislation such as Dodd-Frank, EMIR and other Asian legislations:
- Trading relationship documentation and trade confirmation
- Process and/or methodology for determining valuation
- Portfolio reconciliation
- Portfolio compression
- Dispute resolution
Consistency is positive as introducing new requirements on an industry already heavily burdened with compliance with existing legislation could weaken rather than strengthen the market.
Are the standards harmonised?
What is disappointing is IOSCO falling silent on the timeframes around the standards preferring to use language such as ‘regular intervals’ and ‘timely manner’ in relation to portfolio reconciliations, and ‘appropriate timeliness’ in respect to trade confirmation standards.
Standard practices are good but only if they are performed to standard timeframes. Cross-border activity is common for OTC derivative market participants and differences in the timeframes required by Dodd-Frank and EMIR, for example around when portfolio reconciliations should occur or trade confirmations should be executed, increase opportunities for regulatory arbitrage when the same transactions are subject to conflicting rules.
Industry participants have had positive experiences when agreeing standard practices (for example electronic matching of trade confirmations) but unless timeframes are agreed (for example by close of business trade date plus one), confirms still remain outstanding until both parties perform their side of process.
Therefore regulatory harmonisation is critical to avoid a standard that is not standardly performed. IOSCO as the leading international policy forum for securities regulators globally has the authority to be the global standard setter for securities regulation. It is worthy to note that the published report did highlight the requirement for compatibility of regulatory standards across jurisdictions but fell short of actually prescribing what the timeframes should be. It’s again time for the industry to work together globally to agree a consistent set of timeframes to optimise these risk mitigation standards.