EC's OTC Derivatives consultation met largely with praise from industry

The Investment Management Association (IMA) has welcomed the European Commission's consultation of OTC Derivatives, which aims to improve market infrastructure and to ensure an efficient, safe and robust derivatives market.

The IMA particularly welcomes the consultation, which also seeks to improve this market following the credit crisis and Lehman administration, in its claim the central clearing houses should take on much of the responsibility for clearing and settling OTC derivative contracts.

"Financial markets are for investors and capital raisers, not for intermediaries," commented Jane Lowe, director of markets at IMA. "Therefore we welcome the Commission's proposals to promote the clearing and settlement of OTC derivate contracts in central clearing houses. This will allow for better counterparty and collateral risk management; and greater certainty and speed of action in the event of a counterparty default. It should also bring clearer information to the market which will assist investors with daily pricing of portfolios."

The IMA has, however, made some recommendations to the Commission, and would like to see measures put in place to ensure competition disciplines are maintained, as there is the potential for "monopolistic structures" to emerge. "A high level of governance is also required so that clearing houses are not vulnerable to inappropriate shareholder and stakeholder influences. Lastly, if clearing houses are to take on a more substantial role in terms of market infrastructure it is important that they should have sufficient capital support to see this role through."

The International Swaps and Derivatives Association (ISDA), the Securities Industry and Financial Markets Association (SIFMA), and the London Investment Banking Association (LIBA) have also welcomed the further improvements in market infrastructure and initiatives outlined by the EC, and are particularly pleased with the EC's acknowledgement of " the clear value played by OTC derivatives markets," which have remained open and resilient throughout the financial crisis.

Robert Pickel, executive director and CEO of ISDA, added: "We have a simple message from all those that use these vital risk management products. The real economy faces diverse risks and depends on privately negotiated derivates to address them effectively. As long as risk itself is not standardised, then tailored instruments will remain important."

The Associations added recommendations, stating that the EC coordinate closely with US and Asia regulators when it comes to recognising different asset classes, and that Central Counterparty (CCP) clearers need to work closely with clearing members to determine the eligibility of individual contracts for central clearing, based on key aspects of product class, CCP capability, and the ability of major market participants to support the default process.

Other recommendations include having CCPs demonstrate an exceptional level of financial and operational robustness.

However, ISDA, SIFMA and LIBA are not in favour of additional new penalties for contracts that are not centrally cleared, and said while there are benefits from having CCPs in privately negotiated derivative markets, there are also strong reasons for not clearing all trades.

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