The Committee of European Securities Regulators (CESR), the body that harmonises securities markets regulation across Europe, has issued consultation papers on measures to make the European OTC derivatives market more secure and efficient.
Feedback to the papers will be offered as technical advice to the European Commission which will prepare final drafts of legislative proposals for approval in September 2010.
Concerns over OTC derivatives were heightened in the recent financial crisis because a lack of transparency in the market led to uncertainty over firms' positions and over-exposure to the instruments, particularly credit default swaps.
As part of the Dodd-Frank Bill, the US Congress has recently approved legislation designed to increase transparency in the derivatives space. All standardised derivatives in the US are to be traded on-exchange, while data on OTC derivatives trades will be collected and published via clearing houses or swaps repositories,
The first CESR paper, ”Standardisation and exchange trading of OTC derivatives' examines the paradox posed by customising derivatives for hedging, and standardising derivatives for electronic processing.
The consultation paper analyses progress made so far towards standardisation under industry-led initiatives, and whether regulatory intervention is needed. Progress on the standardisation initiatives driven by dealers and buy-side institutions was reported to the Federal Reserve Bank of New York and other regulators on 1 March 2010.
The paper asks whether there is an element of standardisation that should be focussed on, or a particular asset class standardisation. It also examines the advantage of standardising derivatives so they could be traded on exchanges and the consequent effect of reducing customisation.
The second CESR consultation paper ”Transaction reporting on OTC derivatives and extension of the scope of transaction reporting obligations', is based on the premise that OTC derivative transactions will be reported to trade repositories. These are planned to retain data on transactions to provide an audit trail, preventing uncertainty over positions in future. The paper examines whether firms would have to report trades to regulatory authorities in addition to the trade repositories, duplicating work.
It also examines extending reporting obligations for instruments traded only on MTFs and to transactions on certain OTC derivatives.
Both papers feature proposals that are follow similar lines to US legislation. CESR has said that it favours the use of electronic confirmation systems and of incentivising the use of organised trading venues in Europe, however it has stepped back from mandating the use of trading venues.
Both consultations will close on 16 August 2010.