The International Organisation of Securities Commissions (IOSCO) has published a consultation report which proposes nine standards aimed at mitigating the risks in the non-centrally cleared over-the-counter (OTC) derivatives markets.

The nine standards are:

  1. Scope of coverage. Financial entities and systemically important non-financial entities (hereinafter called “covered entities”) that engage in non-centrally cleared OTC derivatives should employ risk mitigation techniques consistent with the standards set out in the report;
  2. Trading relationship documentation. Covered entities should establish and implement policies and procedures to execute written trading relationship documentation with their counterparties prior to or contemporaneously with executing a non-centrally cleared OTC derivatives transaction. Such documentation should include all material terms governing the trading relationship between the counterparties;
  3. Covered entities should establish and implement policies and procedures to ensure the material terms of all non-centrally cleared OTC derivatives transactions are confirmed as soon as practicable after execution of the transaction;
  4. Covered entities should agree on and clearly document the process and/or methodology for determining the value of each non-centrally cleared OTC derivatives transaction at any time from the execution of the transaction to the termination, maturity, or expiration thereof, for the purpose of exchanging margins;
  5. Reconciliation. Covered entities should establish and implement policies and procedures to ensure that the material terms and valuations of all transactions in a non-centrally cleared OTC derivatives portfolio are reconciled with counterparties at regular intervals;
  6. Portfolio compression. Covered entities should establish and implement policies and procedures to regularly assess and, to the extent appropriate, engage in portfolio compression;
  7. Dispute resolution. Covered entities should agree on procedures for determining when discrepancies in material terms or valuations should be considered disputes, as well as a related process for resolving such disputes as soon as practicable. The policies and procedures should provide for the prompt notification to authorities of such disputes that remain unresolved after a reasonable period of time if the applicable regulation requires such notification;
  8. Implementation. Authorities should implement the standards described in the report as soon as practicable; and
  9. Cross-border transactions. The different regulatory regimes should interact so as to minimise inconsistencies in risk mitigation requirements for non-centrally cleared OTC derivatives across jurisdictions.

In the consultation report each proposed standard is accompanied by key considerations that describe how the standard should be implemented. Authorities should seek to introduce regulatory requirements or guidance implementing each standard in a way that is consistent with the key considerations. Explanatory notes provide further information on the standards and key considerations, and explain the rationales behind them.

The deadline for comments on the consultation report is 17 October 2014.

View IOSCO consultation report – Risk mitigation standards for non-centrally cleared OTC derivatives, 17 September 2014