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The Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA) today outlined a framework for over the counter (OTC) derivatives risk management and market structure. SIFMA, along with the senior managements of a group of dealers, asset managers and investors, offered the framework and reiterated its commitment to reducing systemic risk in the OTC derivatives market in a letter to the Federal Reserve Bank of New York. The group’s initiatives offer a strong solution to the concerns raised by supervisors and legislators globally, notably the G20, the European Commission and the U.S. Department of Treasury.
“The industry is working towards a constructive, substantive approach to the regulation of over the counter derivatives,” said SIFMA president and CEO Tim Ryan. “A cornerstone of this plan is the creation of a CDS clearinghouse, one of which has already begun to clear and settle CDS transactions, limiting the risk to the larger financial system of any one dealer failing to meet its obligations. This approach also facilitates regulators’ ability to monitor firms’ exposure to over the counter derivative products while simultaneously ensuring each firm holds the necessary collateral. In addition, Congress should provide for regulatory oversight of every systemically significant participant in the derivatives market, appointing a systemic risk regulator to ensure all of these firms are operating in a prudent manner.”
The letter reiterates the group’s commitment to reducing systemic risk in the over the counter derivative markets through the following:
- Mechanisms at central counterparties to assure segregation of customer collateral and portability of accounts in the event of counterparty default.
- Implementing data repositories for non-cleared transactions in these markets to ensure appropriate transparency and disclosure, and to assist global supervisors with oversight and surveillance activities.
- Clearing for OTC standardized derivative products in these markets.
- Enabling customer access to clearing through either direct access as a clearing member or via indirect access, including the benefits of initial margin segregation and position portability.
- Delivering robust collateral and margining processes, including portfolio reconciliations, metrics on position and market value breaks, and improved dispute resolution mechanics.
- Updating industry governance to be more inclusive of buy-side participants.
- Continuing to drive improvement in industry infrastructure as well as to engage and partner with supervisors, globally, to expand upon the substantial improvements that have developed since 2005.
The Asset Management Group commits, for all trades to which the group’s members are a party and which were not cleared through a CCP, to universal recording of trades in a trade repository. For CDS trades, the implementation date is July 17, 2009. Interest rate derivative trades will be recorded by December 31, 2009, and OTC equity derivative trades by July 31, 2010. In addition, the group is actively engaged in discussions with CCPs to broaden the range of cleared products and market participants. Products that will be added in 2009 include liquid single name CDS and overnight indexed swaps. Further products will be added in 2010, including tranche CDS.
