LONDON Feb 29 The derivatives market and
regulators should work together to decide which contracts in the
$700 trillion sector must be centrally cleared to curb risks and
improve transparency, global regulatory body IOSCO said.
The International Organisation of Securities Commissions
said on Wednesday banks and clearing houses should be given a
"bottom up" role, meaning a product would be cleared if a
clearing house made a request, after approval from a regulator.
IOSCO said there should also be a "top down" option, meaning
supervisors can order banks and clearing houses to clear certain
broad classes of products even if a clearing house has yet to be
licensed to do so.
IOSCO was publishing its final recommendations on mandatory
clearing of off-exchange derivatives contracts called for by
leaders of the world's top 20 economies.
It reflects what is already taking place in Japan, the
United States, Hong Kong, Singapore and the European Union.
The industry wants to avoid being faced with diktats from
regulators and having to clear products which clearing houses or
banks feel are unsuited for clearing.
"Authorities implementing a mandatory clearing regime should
consider using a bottom-up approach to determine products that
are subject to a mandatory clearing obligation," the IOSCO
"In assessing a proposal for a new clearing obligation under
the bottom-up approach, a determining authority should conduct a
public consultation," IOSCO said.
However, regulators have included the "top down" approach as
a form of backstop so that the industry cannot avoid clearing
because it may not be profitable even though it would help curb
risk and improve transparency in markets.
"Those central counterparties that are commercial for-profit
entities might be driven by revenue and commercial
considerations, which may not necessarily be aligned with the
core purpose of a CCP, that is risk reduction," Deutsche Bank
said in a research note to clients last November.
"A central counterparty might thus not want to clear a
contract even though this could enhance risk reduction in
derivatives markets," Deutsche Bank said.
IOSCO said exemptions from mandatory clearing should be
narrowly defined and limited.
IOSCO is an umbrella group for all the world's top
securities regulators like the U.S. Securities and Exchange
Commission, Britain's Financial Services Authority and Japan's
Financial Services Agency.