The technical committee of the International Organisation of Securities Commissions (IOSCO) has outlined seven principles for the platforms that will be established following regulations to migrate OTC derivatives to exchange-based trading.
The recommendations are included in a new report prepared by the technical committee's task force on OTC derivatives regulation in response to a request from the Financial Stability Board to examine exchange-based electronic trading of OTC derivative products in response to G-20 leaders' commitments on derivatives. These included improving transparency, mitigating systemic risk and protecting against market abuse.
The seven principles put forward as required characteristics of organised platforms for trading derivatives include: registration with a regulator; access for participants based on fair criteria; pre- and post-trade transparency arrangements; operational efficiency including links to post-trade infrastructure and measures to handle potential disruption to the platform; active market surveillance capabilities, including audit trail capability; transparent rules governing the operation of the platform; and rules that do not permit a platform operator to discriminate between participants in relation to buying and selling interests within the system.
The report also identified an eighth characteristic that would provide benefits, but also additional costs – the opportunity for platform participants to seek liquidity and trade with multiple liquidity providers within a centralised system. It also stressed the importance of standardised application of the principles across all jurisdictions, to avoid discrepancies that might influence participants' choice of venues.
“This report provides regulators, regardless of the state of development of their derivatives markets, with an analytical tool that can inform their current and future efforts at addressing the trading of derivatives on organised platforms, and a range of actions which they can take to facilitate this,” said Hans Hoogervorst, chairman of IOSCO's technical committee.
IOSCO's task force on OTC derivatives regulation was launched in October 2010 and will produce two further reports, one on data reporting and aggregation and another on international standards. It is led by US regulators the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the UK's Financial Services Authority and the Securities and Exchange Board of India.
Efforts to bring derivatives onto standardised platforms are at different stages of progress in Europe and the US. In Europe, MiFID II will include trading venues for derivatives as part of a new organised trading facility category, while the recently established European Securities and Markets Authority will specify which instruments are eligible for clearing. In the US, the SEC and CFTC have proposed rules for new venues that will trade OTC derivatives, but differ over exactly which types of instrument will be included.