Over-The-Counter Derivatives
The financial crisis of 2008 exposed significant weaknesses in the over-the-counter (OTC) derivatives market, including the build-up of large counterparty exposures between market participants which were not appropriately risk-managed; limited transparency concerning levels of activity in the market and overall size of counterparty credit exposures; and remaining operational weaknesses which demonstrated the need for further standardization and automation.

In 2009, the G20 Leaders agreed to reforms in the OTC derivatives market to achieve central clearing and, where appropriate, exchange or electronic trading of standardized OTC derivatives; reporting of all transactions to trade repositories; and higher capital as well as margin requirements for non-centrally cleared transactions. These reforms are being implemented globally through legislative and regulatory measures. Reforms in the U.S. are being carried out under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and rulemakings by U.S. agencies, including the Commodity Futures Trading Commission, Securities and Exchange Commission, as well as prudential regulators including the Federal Reserve.

A resilient and well-functioning over-the-counter (OTC) derivatives market is an important component of the financial markets and broader global economy. The OTC derivatives market:

  • Serves important economic purposes, such as enabling market participants to hedge exposures, invest and manage risks; and
  • Is of systemic relevance due to the interconnectedness between financial institutions that are also active in other key financial markets and market infrastructures.
The Federal Reserve Bank of New York (New York Fed) supports OTC derivatives reform efforts through collaboration with domestic and international authorities. The New York Fed focuses on supervisory matters relating to OTC derivatives processing and clearing, as well as policy and regulatory reform efforts. It participates in international regulatory groups such as the OTC Derivatives Supervisors Group (ODSG), the OTC Derivatives Working Group (ODWG), and workstreams led by standard-setting bodies including Basel Committee on Banking Supervision, Committee on the Global Financial System, Committee on Payment and Settlement Systems, and International Organization of Securities Commissions.
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Chronology of Key Events
2005
OTC Derivatives Supervisors Group (ODSG) formed.
Joint industry and supervisory efforts to deliver structural improvements to the OTC derivatives market initiated.
2008
U.S. Treasury presents recommendations to improve and reform the U.S. financial regulatory structure.
Market participants deliver strategic industry roadmap for improvements across all OTC derivatives asset classes and collateral management practices to ODSG.
2009
OTC Derivatives Regulators Forum (ODRF) formed.
Market participants commit to expand central clearing for OTC derivatives in a commitment letter delivered to ODSG.
G20 Leaders agree on reforms to improve OTC derivatives market, namely: central clearing, and where appropriate exchange or electronic trading, of standardized OTC derivatives; reporting of contracts to trade repositories; and higher capital requirements for non-centrally cleared contracts.
2010
Market participants agree to new commitments to bring greater transparency and standardization to OTC derivatives market, implement collateral management best practices, and further expand use of central clearing in credit and interest rate derivatives markets.
Dodd-Frank Wall Street Reform and Consumer Protect Act is passed.
OTC Derivatives Working Group (ODWG) is formed by the Financial Stability Board to monitor progress in implementing G20 reforms.
2011
G20 Leaders agree to add margin requirements on non-centrally cleared derivatives to reform program for OTC derivatives.
Market participants deliver strategic roadmap to ODSG in support of ongoing efforts to bring improvements and risk reduction to OTC derivatives market. Initiatives and commitments that comprise roadmap are designed to support collective efforts of market participants to meet regulatory requirements in multiple jurisdictions in implementing G-20 objectives.
2012
International Organization of Securities Commissions publishes “Report on Requirements for Mandatory Clearing,” which outlines recommendations that authorities should follow in establishing a mandatory clearing regime for standardized OTC derivatives in support of G20’s Leaders’ commitments to improve transparency, mitigate systemic risk and protect against market abuse in OTC derivatives market.
Committee on Payment and Settlement Systems and the International Organization of Securities Commissions jointly produce “Principles for financial market infrastructures,” which comprise new and more demanding international standards for payment, clearing and settlement systems, including central counterparties.
2013
Basel Committee on Banking Supervision and the International Organization of Securities Commissions issue a near-final proposal on the final policy framework that establishes minimum standards for margin requirements for non-centrally cleared derivatives.
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