Regulators to focus on OTC trades
Jennifer Hughes | Wednesday, 4 June 2008
LONDON: International markets regulators will turn their focus to the potential for improving transparency in over-the-counter markets as part of work into the issues thrown up by the credit crunch.
The International Organisation of Securities Commissions (IOSCO), the umbrella body representing the world's biggest market watchdogs, has published a report outlining its plans for further work on subprime-related topics.
One of its five main working committees will focus specifically on OTC markets, where counterparties deal directly with each other and face no need to publicise their deals, or the prices at which they traded. This is a departure from the committee's normal focus on more heavily regulated markets.
In an interview with the Financial Times, Michel Prada, head of IOSCO's main technical committee, said: "The subprime crisis has shown that there are issues of transparency, efficiency and robustness.
"We are looking at whether trading and post-trading systems are transparent enough when dealing with over-the-counter (OTC) markets."
Mr Prada said past work had focused more on "plain vanilla" products, such as corporate bonds, that often had links to exchanges and other centres for showing prices, and were generally carefully regulated.
He said: "When it comes to structured products and derivatives, quite often you are in full OTC markets, and I'm not sure things are really optimal."
Banks have already come under pressure from regulators to improve the settlement processes of OTC markets, particularly for complex credit derivatives, amid fears that the sudden collapse of a single large party could freeze the entire financial system as participants struggled to establish their positions.
A group of leading institutions is expected soon to announce the first central clearing house for the products.
IOSCO began its subprime work in November with a group led by Mr Prada and Christopher Cox, head of the US Securities and Exchange Commission. The body has published its report in Paris as part of its main annual gathering.
The draft paper was discussed earlier by its technical committee, which comprises the biggest market regulators. Few strong recommendations are expected; rather the report will outline plans for further work.
Mr Prada said: "On most of the issues we have identified what went wrong and tried to identify why. Therefore we have decided to ask the standing committees to do some more work, together with the industry, to either improve existing standards or to make new proposals where needed. These matters really are very complex and technical; none of them are ones where we can come to rapid conclusions."
The International Organisation of Securities Commissions (IOSCO), the umbrella body representing the world's biggest market watchdogs, has published a report outlining its plans for further work on subprime-related topics.
One of its five main working committees will focus specifically on OTC markets, where counterparties deal directly with each other and face no need to publicise their deals, or the prices at which they traded. This is a departure from the committee's normal focus on more heavily regulated markets.
In an interview with the Financial Times, Michel Prada, head of IOSCO's main technical committee, said: "The subprime crisis has shown that there are issues of transparency, efficiency and robustness.
"We are looking at whether trading and post-trading systems are transparent enough when dealing with over-the-counter (OTC) markets."
Mr Prada said past work had focused more on "plain vanilla" products, such as corporate bonds, that often had links to exchanges and other centres for showing prices, and were generally carefully regulated.
He said: "When it comes to structured products and derivatives, quite often you are in full OTC markets, and I'm not sure things are really optimal."
Banks have already come under pressure from regulators to improve the settlement processes of OTC markets, particularly for complex credit derivatives, amid fears that the sudden collapse of a single large party could freeze the entire financial system as participants struggled to establish their positions.
A group of leading institutions is expected soon to announce the first central clearing house for the products.
IOSCO began its subprime work in November with a group led by Mr Prada and Christopher Cox, head of the US Securities and Exchange Commission. The body has published its report in Paris as part of its main annual gathering.
The draft paper was discussed earlier by its technical committee, which comprises the biggest market regulators. Few strong recommendations are expected; rather the report will outline plans for further work.
Mr Prada said: "On most of the issues we have identified what went wrong and tried to identify why. Therefore we have decided to ask the standing committees to do some more work, together with the industry, to either improve existing standards or to make new proposals where needed. These matters really are very complex and technical; none of them are ones where we can come to rapid conclusions."