On 19 November 2018, the International Organisation of Securities Commissions (IOSCO), jointly with other international standard setting bodies, published a final report on incentives to centrally clear over-the-counter (OTC) derivatives.
The final report provides that:
- the changes observed in OTC derivatives markets are consistent with the G20 Leaders’ objective of promoting central clearing as part of mitigating systemic risk and making derivatives markets safer;
- the capital, margin and clearing 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, such as market liquidity, are also important and can interact with regulatory factors to affect incentives to centrally clear;
- the provision of client clearing services is concentrated in a relatively small number of bank-affiliated clearing firms and this concentration may have implications for financial stability; and
- some categories of clients have less strong incentives to use central clearing, and may have a lower degree of access to central clearing.
The final report also suggests that the treatment of initial margin in the leverage ratio can be a disincentive for client clearing service providers to offer or expand client clearing. As such, there are two aspects to consider:
- as the leverage ratio is a non-risk-based approach, initial margin does not reduce the leverage ratio’s exposure measure for derivatives, including for client cleared OTC derivatives; and
- when client initial margin is held on a firm’s accounting balance sheet, it may increase the leverage ratio’s exposure measure, even in jurisdictions where relevant regulations require that such margin is segregated and restrictions exist on its use by the firm as a source of leverage. This might increase the cost of clearing, especially for clients with portfolios which attract higher amounts of initial margin.