Financial Stability Board Reviews OTC Derivatives Clearing


A key objective for G20 countries announced at their Pittsburgh Summit in 2009 was to reduce systemic risk in the global financial system by moving over-the-counter (‘OTC’), bespoke derivatives into central clearing houses. The bilateral risk is assessed and taken onto the books of the CCP for the entire life of those instruments. To achieve that level of risk management over the entire term of each contract, the OTC contracts had somehow to be standardised, which by definition is a contradiction with their specific, tailored nature and purpose. It was always going to be hard to square that circle; the CCP segment was not made for this purpose.

In 2013, as these new and very different instruments were progressively introduced into the risk books of the world’s CCPs, Thomas Murray completed the preparation of its clearing house risk assessment programme, which went live that September. It covers 29 CCPs around the world, and evaluates such risks as counterparty, financial, treasury, liquidity, asset safety, operational, and governance and transparency. The detailed questionnaire, developed with market actors, is a model for the segment, and has long since been shared with IOSCO, the Committee on Payments and Market Infrastructures, the Basel Committee of Banking Supervisors, and the Financial Stability Board (FSB) - the very same actors leading this global review. IOSCO has used the Thomas Murray assessments for its annual global risk reviews.

In 2014, the FSB coordinated a first review of progress being made in this absorption of systemic risk into a market infrastructure. Just before the year-end holidays last December, the FSB made a further announcement mid-way through its current assessment of progress being made.

The current assessment

In recognition of the risk concentration caused by the push of OTC derivatives into central clearing, the FSB has formed a working party with global regulators to monitor the progress and effects of this shift. In July 2017, the FSB published a report presented to the G20 heads of government at their annual meeting in Hamburg on the resilience, recovery, and resolvability of central counterparties. Thomas Murray contributed commentary to that work.

But this shift in risk requires ongoing monitoring, and so the FSB-led working party of other standard-setting bodies has agreed to undertake together an evaluation of the impact of G20 reforms on incentives to clear OTC derivatives centrally. The incentives were cost-based, making bilateral position monitoring far more expensive for the counterparties to each derivative contract.

The study now underway and due for completion towards the end of 2018 will be undertaken by the Derivatives Assessment Team (‘DAT’), composed of a grouping of representatives of these several bodies; it will review the interaction of reforms affecting incentives for clearing. It will be carried out under the new FSB framework for post-implementation evaluation of effects of the G20 financial regulatory reforms, the so-called ‘Evaluation Framework.’[1] The study follows an earlier review of the topic published in 2014, but takes on additional material and a new form.[2]

The authorities consider it to be an appropriate time to re-examine whether adequate incentives to clear centrally are in place. Central clearing of standardised OTC derivatives was a key pillar of the G20 Leaders’ commitments to reform OTC derivatives markets in response to the financial crisis. At the height of the crisis in 2008, policymakers had no clear idea of how many contracts were outstanding, between which parties, what their content was, what they might have been worth, or what their liquidation periods were. The key reforms relevant to incentives for central clearing were agreed and have been implemented for several years now. Central clearing rates have increased markedly since 2009, notably in interest rate derivatives and credit derivatives.[3]

Concerns have been raised by some, however, that the interaction of some post-crisis reforms may have contributed to still inadequate incentives to clear centrally, or may otherwise affect costs associated with providing clearing services or with accessing central clearing for some market participants, in ways that do not support the G20 Leaders’ commitments. It would also be useful to understand how these incentives affect broader market functioning, and so this is a central goal for the study.

Several major post-crisis reforms have, or are expected to have, a cumulative impact on the incentives of market participants, including both dealers and end-users, to clear OTC derivatives through CCPs. Such reforms include:

  • BCBS-IOSCO margin requirements for non-centrally cleared derivatives
  • CPMI-IOSCO Principles for Financial Market Infrastructures
  • Basel III framework elements, including interim and final requirements for bank exposures to CCPs and to non-centrally cleared derivatives, the Leverage Ratio, and the Liquidity Coverage Ratio.

Importantly, other national and regional policy differences, including exemptions and accounting and netting rules, may also affect the incentives to centrally clear OTC, and global authorities need to learn more about what these are and what the effects may be.

What the working party is charged with doing

The DAT study seeks to deliver a comprehensive assessment of whether the reforms are giving strong enough and correct incentives to move bilateral contracts, across different asset classes/product types and for various classes of counterparty, into central clearing facilities, as would be consistent with the G20 reform objectives set in 2009. It would also seek to take into account national and regional policy measures where these may be material to the overall structure of incentives. The DAT study’s evaluation of the interaction of reforms will help inform any subsequent policy recommendations, bearing in mind the financial stability objectives of the reforms. It is perhaps the interaction analyses that will prove to be most interesting, because application of a change or modification in regulation does not come into effect in isolation.

The assessment will be carried out by a specially constituted working group of approximately 25 representatives from a range of member authorities of the relevant standard-setting bodies. This working group will be responsible for developing the framework, consulting with industry representatives, conducting the analysis, writing the report, and proposing any recommendations that may be considered useful as a mid-course adjustment.

[1] FSB, Framework for Post-Implementation Evaluation of the Effects of the G20 Financial Regulatory Reforms, July 2017, at

[2] See BIS, Regulatory reform of over-the-counter derivatives: an assessment of incentives to clear centrally: A report by the OTC Derivatives Assessment Team, established by the OTC Derivatives Coordination Group, October 2014, at

[3] See FSB, Review of OTC derivatives market reforms: Effectiveness and broader effects of the reforms, June 2017, at


The author, Thomas Krantz, is Senior Advisor, Capital markets, in the firm of Thomas Murray; and served as Secretary General of the World Federation of Exchanges (2000-2012). The views expressed are his own, and not necessarily those of the firm.

Tags: OTC derivatives clearingover-the-counterrisk managementrisk assessmentCCPIOSCOFSBDerivatives Assessment TeamDATEvaluation FrameworkG20central clearing