On 7 August 2018, a group of international standard setting bodies (the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures, the Financial Stability Board (FSB) and the International Organization of Securities Commissions) published a consultative document on incentives to centrally clear over-the-counter (OTC) derivatives.

The international standard setting bodies reconvened the Derivatives Assessment Team (DAT) to “re-examine whether adequate incentives to clear centrally OTC derivatives are in place” as one of the first evaluations under the FSB framework for the post-implementation evaluation of the effects of the G20 financial regulatory reforms. The consultative document sets out the DAT’s findings, as well as describing the data, methodologies and analyses that support these findings, for public comment. The final report will be completed later this year.

The data collected by the DAT suggest the following:

  • changes in the OTC derivatives market are consistent with the G20 Leaders’ objective of promoting central clearing as part of mitigating systemic risk and making derivatives markets safer;
  • relevant post-crisis reforms taken together, appear to create an overall incentive at least for dealers and larger and more active clients, to centrally clear OTC derivatives;
  • non-regulatory factors are also important and can interact with regulatory factors to affect incentives to centrally clear;
  • some categories of clients have less strong incentives to use central clearing, and may have a lower degree of access to central clearing;
  • the provision of client clearing services is concentrated in a relatively small number of bank-affiliated clearing firms; and
  • some regulations aimed at improving institutional resilience may in some circumstances be discouraging individual firms from providing client clearing services.

Part F of the consultation paper offers a detailed analysis of the G20 regulatory reforms. The DAT notes that capital, clearing mandates and margin requirements for uncleared derivatives are the key reforms in driving regulatory incentives to centrally clear. The DAT urges international regulators to consider the design of these reforms.

The DAT suggests that further analysis of the economics of client clearing and the relevant standards and their interaction with non-regulatory factors may be warranted in order to understand better the role of regulation and whether policy action is merited given the authorities’ objectives

The deadline for responses to the consultative document is 7 September 2018.