On 2 February 2010 the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organisation of Securities Commissions (IOSCO) launched a review of a number of standards used in the financial market framework. Both bodies also announced that they would be fast-tracking previously announced Central Counter Party (CCP) guidance in light of the number of CCPs for over-the counter (OTC) derivatives which have recently emerged.
The global financial crisis is cited as one of the main reasons for the CPSS-IOSCO review. Although both organisations believe that the global financial market infrastructure bore the brunt of the crisis well, the CPSS-IOSCO committees “believe that there are lessons to be learned from the crisis and, indeed, from the experience of more normal operation in the years that have passed since the standards were originally issued.” This is pertinent, given that some of the following standards, which are to be the subject of the review, date back nine years:
- 2001 Core Principles for Systemically Important Payment Systems
- 2001/2002 Recommendations for Securities Settlement Systems
- 2004 Recommendations for Central Counterparties
Aim of the Review
One of the essential goals of the CPSS-IOSCO review is to enhance financial stability in the markets by reducing systematic risk. The increasing size of the OTC derivatives market, now reported to be in the region of US$450 trillion, and the emergence of new CCPs have prompted these organisations to review the current standards applicable to CCPs in order to try and eliminate any areas of systematic risk.
CCPs have been encouraged over the past few years as one way to tackle risk in the financial markets. These clearing houses have specific funds ensuring completion of trades where they would otherwise have been in jeopardy due to a default by the relevant counterparty, eliminating counterparty risk to an extent. The CPSS-IOSCO review seeks to reconsider the standards applicable to these CCPs to ensure that they are effective in today’s financial markets, and comes at a time where, as previously reported by McDermott, the European Commission is also looking to review and propose legislation in relation to CCPs. See link below for further information:
In addition to IOSCO and CPSS, it has been reported that the International Monetary Fund and the World Bank will also be contributing to the review.
The announcement confirms the increasing international regulatory focus associated with clearing houses and clearing risks generally. Although the revised standards could impose tighter controls on clearing houses, the review should be welcomed in light of the increasing on-exchange clearing of OTC trades, the emergence of new CCPs and the further reduction of systematic risk in the financial markets.