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US regulatory reforms to drive automation in OTC trading

14 May 2009  |  8342 views  |  0 chip reader  buttons

The US Treasury has proposed a series of regulatory reforms designed to improve transparency in over-the-counter derivative trading and encourage a market-wide shift to exchange-based electronic platforms.

The overhaul is intended to plug critical gaps and weaknesses in the financial system and restore confidence in the markets following the catastrophic events of the past 20 months.

Under the plans, the Commodity Exchange Act (CEA) and the securities laws would amended to require clearing of all standardised OTC derivatives through regulated central counterparties (CCP). Further amendments would impose tough capital, record-keeping and audit requirements on market participants with the aim of driving more business onto exchange-based electronic platforms. The proposals also call for the development of a system for the timely reporting of trades and prompt dissemination of prices and other trade information.

In a statement accompanying the proposals, the Obama Administration says it will work with Congress to implement the framework in the US and promote the implementation of similar measures around the world.

Responding to the proposals, the London-based Wholesale Market Brokers' Association - which represents the interests of interdealer brokers - said the Tresuary had failed to recognise that most of the severe losses suffered by banks occurred in the structured credit markets and not in the OTC CDS market and warned of the impact of coercing OTC products on to exchanges.

David Clark, chairman, WMBA, says: "The WMBA wishes to warn again that forcing OTC products onto exchanges would significantly reduce liquidity in financial markets, resulting in increased risks and costs for end users as their ability to hedge their exposures would be handicapped.

"The WMBA believes that European initiatives indicate a firmer grasp of the essential role of the clearing house, and understanding of the transparency and post trade security inherent in the activities of banks, and WMBA members that use platforms that are MiFID compliant in an already regulated environment."

The proposals received a warmer welcome among the exchange community. Shares in the CME and Intercontinental Exchange - which both offer central clearing for CDS contracts - moved up on the news. Nasdaq CEO Bob Greifeld meanwhile expressed his pleasure "that the Administration has recognized the benefits of central clearing and the efficiency of electronic exchanges."

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