The International Organization of Securities Commissions (IOSCO) has
recommended high-level international standards for the regulation of market
participants that are in the business of dealing, making a market or
intermediating transactions in OTC derivatives. Historically these derivatives
market intermediaries have not been subject to the same level of regulation as
participants in the traditional securities market. Without sufficient regulation, said IOSCO,
some derivatives intermediaries operated in a manner that created risks to the
global economy that manifested during the financial crisis of 2008. Noting that
many derivatives intermediaries operate in multiple jurisdictions, IOSCO
emphasized that consistency among market authorities with respect to the
regulation of derivatives intermediaries is essential to the successful
oversight of the global OTC derivatives market.
The IOSCO recommendations follow on the commitment by G-20 leaders to
reform the OTC derivatives market in response to the crisis. They take into
account distinctions between the OTC derivatives market and the traditional
securities markets, and the differences in jurisdictional approaches of
international market authorities. The recommendations are intended to address
the obligations of derivatives intermediaries that should help
mitigate systemic risks and the requirements intended to
manage counterparty risk in the OTC derivatives markets, as well as to protect
participants in the OTC derivatives markets from unfair, improper or fraudulent
practices.
As a threshold matter, IOSCO recommends that derivatives market
intermediaries subject to registration and regulation should generally include
those who are in the business of dealing, making a market or intermediating
transactions in OTC derivatives. Thus, derivatives intermediaries should not
include end-users and market participants who enter into OTC derivatives
transactions but are not engaged in the business of dealing, making a market or
intermediating transactions.
More specifically, IOSCO recommends that derivatives intermediaries be
subject to capital requirements and business conduct standards, including
prohibitions against fraud, manipulation and other abusive practices. Business
conduct requirements should be tailored for the OTC derivatives market and
based on the reasonable assessment of the nature of the party dealing with a derivatives
intermediary or on the complexity of, and the risk associated, with the
specific OTC derivatives product.
Importantly, IOSCO recommends that derivatives intermediaries be required
to have effective corporate governance frameworks designed to ensure
appropriate management of OTC derivatives activities, including risk management
systems to identify and manage their OTC derivatives-related business risks.
They should also be required to establish systems of control sufficient to
provide reasonable assurance of compliance with regulations. They should also
develop an effective business continuity plan, based on their size and risks,
to allow them to mitigate and respond to business disruptions.
With regard to cross-border issues, if a derivatives intermediary registered
in its home jurisdiction is carrying on OTC derivatives business in
another jurisdiction in which it is not registered, IOSCO recommends that the
market authority of the host jurisdiction in which the derivatives intermediary
is carrying on business should ensure that there is appropriate supervisory
arrangements in place for that OTC derivatives business, including how the derivatives
intermediary is supervised in the host
jurisdiction and any cooperative arrangements in place between the market
authorities of the home and host jurisdictions. Market authorities are urged to
closely cooperate to identify overlaps, conflicts and gaps between
jurisdictions with respect to cross-border issues relating to the regulation of
derivatives intermediaries and ensure that the activities in the host
jurisdiction are adequately supervised. It is further recommended that
jurisdictions coordinate their approaches via multilateral or bilateral
channels to reduce overlaps and conflicts.