IOSCO and Basel Committee outline new requirements to cut derivatives risk

9 July 2012

The Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) have published a consultative paper on margin requirements for non-centrally-cleared derivatives, and have invited public feedback on the scope, feasibility and impact of its proposed measures.

The BCBS said that the paper follows the 2009 reform programme initiated by leaders of the G20 developing nations to reduce the systemic risk of over-the-counter (OTC) derivatives markets. In particular, several measures were agreed to enhance the transparency and regulation of OTC derivatives, including mandatory central clearing. However, mandatory clearing requirements will capture only standardised OTC derivatives and non-standardised products will continue to be non-centrally cleared and remain subject to bilateral counterparty risk management.

In 2011, the G20 leaders agreed to add margin requirements on non-centrally-cleared derivatives to the post-2008 crash reform programme. The aim was to further mitigate systemic risk in the derivatives markets, encourage standardisation and promote central clearing of derivatives by reflecting the generally higher risk of non-centrally-cleared derivatives.

The BCBS said that the latest consultative paper lays out a set of high-level principles on margining practices and treatment of collateral, and proposes margin requirements for non-centrally-cleared derivatives. These policy proposals are articulated through a set of key principles that primarily seek to ensure that appropriate margining practices will be established for all non-centrally-cleared OTC derivative transactions. These principles will apply to all transactions that involve either financial firms or systemically important non-financial entities.

The BCBS and IOSCO plan to conduct a quantitative impact study (QIS) during the period of consultation, which will run to Friday 28 September 2012.

By Derek Julian

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