The Futures and Options Association (FOA), an industry body, has insisted that standardisation of contracts should not be subject to legislation, following a consultation by the Committee of European Securities Regulators (CESR) on reform of over-the-counter (OTC) derivatives in Europe.
At the end of July, CESR, which is responsible for harmonising European securities regulation, issued a consultation paper titled ”Standardisation and exchange trading of OTC derivatives', which explored the potential advantages of standardising derivatives so they could be traded on exchanges and the impact of reducing customisation. The consultation closed on 16 August, but CESR is still waiting for late responses and hopes to publish all submissions by next Monday.
Within the next few weeks, CESR will consolidate feedback from market participants and produce a technical advice paper for the European Commission, which plans to produce a final draft of legislative proposals for approval by the end of September 2010.
In its response, the FOA supports CESR's position on the advantages that exchanges can provide in terms of transparency, centralised supervision and post-trade processing of OTC derivative contracts, but doubts whether standardisation – and subsequent on-exchange trading – of contracts should be subject to a regulatory mandate. According to the FOA, there is no reason why users of OTC derivatives should not be allowed to continue using their preferred execution methodologies for the contracts they enter into.
“In view of current industry initiatives to reduce the risk of bilaterally executed OTC transactions, a regulatory mandate does not seem either advisable or necessary, certainly at this stage,” said Anthony Belchambers, chief executive, FOA. “The risks of unintended market consequences are all too obvious.
The advantages of trading on-exchange are well known, but product diversity is critically important if the risk-management capabilities of end-users are not just to be sustained, but actually enhanced.
After all, the need to enhance risk management capability was one of the key lessons of the crisis.”
Concerns over the risks associated with trading OTC derivatives came to the fore after the recent financial crisis. Regulators of both sides of the Atlantic have unveiled initiatives to bolster the OTC derivatives market after a lack of transparency led to uncertainty over firms' positions and over-exposure to the instruments, particularly credit default swaps.