The Financial Stability Board, the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures and IOSCO re-examined whether adequate incentives to clear centrally over-the-counter ("OTC") derivatives are in place. The first assessment of incentives to centrally clear OTC derivatives was published in 2014.

In the new Consultation Report, the international standard-setting bodies found, among other things, that:

  • changes in OTC derivatives markets are consistent with the G20 objectives to promote central clearing;
  • post-crisis reforms – in particular, capital, margin and clearing – have incentivized "dealers and larger and more active clients" to clear derivatives;
  • certain clients have less of an incentive to use central clearing and may also have less access to central clearing;
  • treatment of initial margin in bank leverage ratios can be a disincentive for banks to offer clearing services; and
  • the provision of client clearing services is concentrated in a small number of firms.

Comments on the consultation paper must be submitted by September 7, 2018. The final report will be completed later this year.

Commentary / Steven Lofchie

The Report takes as its starting question whether there are sufficient incentives to mandate central clearing of derivatives. It would have been better if it asked (i) whether central clearing is progressing in the manner in which the regulators predicted or intended and (ii) how much mandated central clearing is really a good thing. Even though the Report is not intended to be an analysis of the actual benefits of central clearing, two big negatives jump out: (i) the rather incredible degree of centralized risk that regulators created with five banks dominating the market and (ii) that smaller firms have difficulty accessing central clearing services or prefer not to clear at all.

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