Capital Market

IOSCO Unveils Nine Standards on Risk Mitigation for Non-Centrally Cleared OTC Derivatives

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Lagos (INVESTADVOCATE)-Global securities regulator, the International Organisation of Securities Commissions (IOSCO) on Wednesday unveiled a final report which sets out nine (9) standards aimed at mitigating the risks in the non-centrally cleared OTC derivatives markets, it said in a statement.

IOSCO said the set of risk mitigation standards were developed in consultation with Basel Committee on Banking Supervision (BCBS) and the Committee on Payments and Market Infrastructures, to further strengthen the non-centrally cleared OTC derivatives market.

The nine (9) standards cover the scope of coverage, trading relationship documentation, trade confirmation, valuation with counterparties and reconciliation.

Others are portfolio compression, dispute resolution, implementation and cross-border transaction.

Lee Boon Ngiap, Chair of the IOSCO Working Group on Risk Mitigation Standards for Non-centrally Cleared Derivatives, and assistant managing director of the Monetary Authority of Singapore, said: “The risk mitigation standards, along with the margin requirements, will help market participants better manage risks in transacting in non-centrally cleared OTC derivatives and improve the resilience of the non-centrally cleared OTC derivatives market.”

According to world securities regulator, the standards encourage the adoption of sound risk mitigation techniques to promote legal certainty over the terms of the non-centrally cleared OTC derivatives transactions, to foster effective management of counterparty credit risk and to facilitate timely resolution of disputes.

This is coming on the heels of how the global financial crisis highlighted the inter-connectedness across financial institutions engaged in trading OTC derivatives led to contagion and heightened systemic risk.

“One of the key components of the G20 reform programme has been to encourage the central clearing of standardised OTC derivatives. However, a substantial proportion of OTC derivatives are not standardised and hence not suitable for central clearing,” IOSCO added. 

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