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
The report makes the following
- 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
- Registration or licensing
requirements applicable to DMIs should be tailored to OTC derivatives
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
- - 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:
- Capital standards or other
financial resources requirements for non-prudentially regulated DMIs;
- Business conduct standards;
- Business supervision
- Recordkeeping standards.
Reporting by Janet du Chenne, Global Custodian, an Asset International publication.