• Asia forum on OTC global derivatives market

    Reforms must be country-tailored – FSB

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    PANGLAO ISLAND, Bohol: Members of the Financial Stability Board Regional Consultative Group for Asia (FSB-RCGA) on Thursday stressed the need to consider individual national circumstances in the implementation of agreed international reforms in over-the-counter (OTC) derivatives markets.

    In a two-day workshop here on OTC derivatives, members of the FSB-RCGA focused on the impact on Asia of the implementation of reforms in the US and Europe, cross-border implementation issues more generally, and market infrastructure that supports derivatives trading in Asia.

    Members said there is a need to consider individual national circumstances in the implementation of agreed international reforms while still maintaining consistency of outcomes and ensuring that the objectives of the reforms are achieved.

    Centralized contract clearing
    In 2009, G20 leaders agreed that standardized OTC derivatives contracts should be cleared through central counterparties (CCPs).
    Since that time, global standard-setting bodies have advanced a number of regulatory reforms that are likely to affect the incentives for central clearing of these contracts.

    These reforms include requirements to exchange initial and variation margin for non-centrally cleared derivatives exposures, standards relating to the measurement of counterparty credit risk for derivatives contracts, and capital requirements for bank exposures to CCPs.
    Appropriate application of proportionality and sequencing of the reforms’ implementation will be useful, the FSB-RCGA members said.
    Given capacity constraints that exist in some emerging market and developing economy (EMDEs), members also highlighted the need for technical assistance with implementation of the OTC derivatives reforms.

    Useful instruments
    Talking about the benefits of derivatives, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr., who is also one of the co-chairmen of FSB-RCGA, said the instruments can be used as hedge against risk.

    “If you are a corporation and you want to hedge against possible movements, let’s say [against]interest rates or exchange rates, then you can enter into a derivative contract with the bank. That’s the crucial role of derivatives, provide the way of hedging risks,” he said.

    Banking reforms
    Meanwhile, members also discussed reforms to international bank regulatory standards and their impact on Asian banks and banking systems.

    Some members emphasized the need to carefully assess the impact on EMDE banking systems of the FSB’s proposed total loss absorbing capacity (TLAC) requirement.

    Given the current interest rate environment and taking into account the specific features in Asian banks and Asian markets, they began by focusing on how to effectively monitor and control interest rate risk in the banking book of Asian banks.

    They then considered the Basel Committee’s recently issued consultative document proposing changes to the Standardised Approach to measure credit risk in the capital framework and how it would affect Asian banks

    The FSB has been established to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability.

    It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts.

    Through the six regional groups, the FSB conducts outreach with about 65 jurisdictions.

    Mark Carney, Governor of the Bank of England, currently chairs the FSB. The Secretariat is located in Basel, Switzerland, and is hosted by the Bank for International Settlements.

    FSB’s Regional Consultative Group in Asia is co-chaired by BSP’s Tetangco and Masamichi Kono, vice commissioner for International Affairs at the Financial Services Agency of Japan.

    Its membership includes financial authorities from Australia, Cambodia, China, Hong Kong SAR, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan, Philippines, Singapore, Sri Lanka, Thailand and Vietnam.

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