In its response, published today, to the CESR Consultation Paper, “Standardisation and Exchange Trading of OTC Derivatives”, the FOA welcomes CESR’s recognition of the advantages of exchanges in terms of transparency, centralised supervision and post-trade processing. On the other hand, the FOA does not accept that the trading of standardised contracts on organised trading platforms (or the standardisation of OTC contracts) should be the subject of a regulatory mandate. Regulatory concerns surrounding bilateral execution of OTC contracts are in the process of being addressed by the industry and there is no reason why end-users should not continue to enjoy the right to select their preferred execution methodologies for the contracts entered into by them.
The FOA supports CESR’s acknowledgement of the need to preserve the ability of non-financial institutions to use OTC derivatives to hedge their risks, but would urge CESR to consider extending that recognition to cover, for example, the equivalent risk management activities of fund managers.
The FOA notes the recognition given by CESR to market differentiation, particularly in relation to commodity markets, and the importance of sustaining the availability of bespoke contracts. It is important that this recognition is given full practical expression in developing new regulatory standards for the markets.
Anthony Belchambers, FOA chief executive, said: “In view of current industry initiatives to reduce the risk of bilaterally executed OTC transactions, a regulatory mandate does not seem either advisable or necessary, certainly at this stage. The risks of unintended market consequences are all too obvious. The advantages of trading on-exchange are well known, but product diversity is critically important if the risk-management capabilities of end-users are not just to be sustained, but actually enhanced. After all, the need to enhance risk management capability was one of the key lessons of the crisis.”