IOSCO sets standards for derivatives intermediaries

The International Organization of Securities Commissions (IOSCO) has published its final report on international standards for derivatives market intermediary regulation. 



The report follows the commitment of the G20 leaders to reform the OTC derivatives market to improve transparency, mitigate systemic risk and protect against market abuse. 


The IOSCO report furthers these objectives by providing high-level international standards for the regulation of market participants that are in the business of dealing, making a market or intermediating transactions in OTC derivatives, referred to as derivatives market intermediaries (DMIs)

The report focuses on the regulation of DMIs, taking into account the distinctions between the OTC derivatives market and the traditional securities markets, and the differences in jurisdictional approaches of international market authorities.



The 15 recommendations in the report are intended to address: 
 

• DMI obligations that should help mitigate systemic risks;

• Requirements intended to manage counterparty risk in the OTC derivatives markets; and

• Protecting participants in the OTC derivatives markets from unfair, improper or fraudulent practices.



In particular, the report considers the market participants who should be regulated as DMIs, given their type and level of involvement within the OTC derivatives market, and describes the substantive areas that generally comprise regulation. The regulation of DMIs should be primarily focused on areas where capital, counterparty or client money and public confidence may be most at risk, says IOSCO.



The report begins by providing a description and definition of the market participants who should be considered DMIs, including a discussion of the characteristics distinguishing DMIs from traditional securities market intermediaries. 



The recommendations are focused on DMIs dealing with non-retail clients/counterparties who currently comprise the majority of the clients/counterparties in the OTC derivatives market. 


The report makes the following recommendations: 


• DMIs should generally include those who are in the business of dealing, making a market or intermediating transactions in OTC derivatives. However, DMIs should not include end-users and market participants who enter into OTC derivatives transactions but are not engaged in the business of dealing, making a market or intermediating transactions. 


• Registration or licensing requirements applicable to DMIs should be tailored to OTC derivatives activities. 
• 
The registration or licensing of DMIs should establish minimum standards and require DMIs to provide and update information with regard to their OTC derivatives activities to regulators to assist them in determining whether registration or licence should be granted and/or revoked. 


• Relevant material information on licensed or registered DMIs should be made publically available. 


• If a DMI registered or licensed in its home jurisdiction is carrying on OTC derivatives business in another jurisdiction in which the DMI is not registered or licensed, the market authority of the host jurisdiction in which the DMI is carrying on business should ensure that there are appropriate supervisory arrangements in place for the OTC derivatives business carried on by that DMI. These arrangements should take into account how the DMI is supervised in the host jurisdiction and any cooperative arrangements in place between the market authorities of the home and host jurisdictions.
• Market authorities should consider imposing some form of capital or other financial resources requirements for DMIs that are not prudentially regulated that reflect the risks that these intermediaries undertake. 


• DMIs should be subject to business conduct standards. These standards would include, among other things, prohibitions against fraud, misrepresentation, manipulation and other abusive practices.


• - Business conduct requirements should be tailored, as appropriate, for the OTC derivatives market. This could be based on the reasonable assessment of the nature of the party dealing with a DMI or on the complexity of and the risk associated with the specific OTC derivatives market product or service. 


• For cleared OTC derivatives transactions, DMIs should segregate collateral belonging to clients from their own proprietary assets and employ an account structure that enables the efficient identification and segregation of positions and collateral belonging to DMI clients. Where applicable and possible, DMIs should have in place procedures to facilitate the rapid transfer or porting of cleared client positions and collateral. 


• 
DMIs should be required to develop and maintain an effective business continuity plan, based on their size, risks, and the nature of their operations, to allow them to mitigate, respond to and recover from business disruptions or disasters. 



DMIs should be required to retain OTC derivatives transaction records and be able to provide them in a timely, organised and readable manner. The record retention period for OTC derivatives transactions should apply for a specified period after its termination, maturity or assignment.

The remainder of this report makes recommendations with respect to the following substantive areas: 


• Registration/licensing standards; 

• Capital standards or other financial resources requirements for non-prudentially regulated DMIs; 

• Business conduct standards; 

• Business supervision standards; and 

• Recordkeeping standards.

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