International policymakers should work together to erase inconsistencies in margin and regulatory capital requirements for exchange-traded derivatives (ETDs), the World Federation of Exchanges (WFE) has urged.
WFE, which represents 59 publicly regulated stock, futures, and options exchanges and associated clearing houses, sent a letter to the Financial Stability Board (FSB) calling for international regulatory bodies to modify capital standards to appropriately reflect the liquidity and efficiency of ETD markets.
The letter further urged the FSB to co-ordinate and collaborate with the Basel Committee on Banking Supervision (BCBS), the committee on Global Financial System, the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) to resolve differences between the initial margin approach set out in the CPSS-IOSCO principles for financial market infrastructures and the conflicting BCBS interim capital framework.
The BCBS’ interim capital standards proposal “seeks to apply a blanket five-day margin period or risk standard to highly liquid and transparent ETDs,” the WFE says in the letter from Hüseyin Erkan, chief executive officer, and Jorge Alegria, chairman of the International Options Markets Association (IOMA), which is the WFE’s global association of options and futures exchange leaders.
If adopted by the BCBS and implemented by national bank regulators, the five-day capital standard would conflict with current margin standards for highly liquid ETDs, resulting in increasing costs for users of exchange-traded markets.
“This may force exchange users (e.g. manufacturers, food producers, employee pension funds, and investors) to either discontinue critical hedging practices or move activity to the less transparent OTC derivative markets. Such outcomes would clearly undermine the G20 OTC market reform commitments,” the letter states.
The association has asked global standard setters to eliminate the five-day margin period of risk banking capital standard for ETDs and demonstrate international support for the more appropriate current standards for the highly liquid, transparent, and efficient exchange traded derivative markets.
“Such action by global standard setters will be instrumental in advancing the G20’s commitment to bring increased transparency and the safety and soundness of central clearing to the global derivatives market and broader financial system,” read the letter.