Derivatives, or financial instruments whose value is based on an
underlying asset, played a key role in the financial crisis of
2008-2009. Congress directly addressed the governance of the
derivatives markets through the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank; P.L. 111-203; July 21, 2010).
This Act, in Title VII, sought to bring the largely unregulated
over-the-counter (OTC) derivatives markets under greater regulatory
control and scrutiny. Pillars of this approach included mandating
that certain OTC derivatives be subject to central clearing, such
as through a clearinghouse, which involves posting margin to cover
potential losses; greater transparency through trading on exchanges
or exchange-like facilities; and reporting trades to a repository,
among other reforms. In the debates over Dodd-Frank and in
subsequent years, many in Congress have raised the following
important questions: If the United States takes stronger regulatory
action than other countries, will business in these OTC derivatives
markets shift overseas? Since OTC derivatives markets are global in
nature, could derivatives trading across borders, or business for
U.S. financial firms that engage in these trades, be disrupted if
other countries do not adopt similar regulatory frameworks? The
first step in addressing these congressional concerns is to examine
the degree to which other major countries have adopted similar
legislation and regulation as the United States, particularly in
light of commitments from the Group of Twenty nations (G-20) to
adopt certain derivatives reforms. Following the financial crisis,
G-20 leaders (generally political heads of state) established a
reform agenda and priorities within that agenda for regulating and
overseeing OTC derivatives. The G-20 as an organization has no
enforcement capabilities, but relies on the members themselves to
implement reforms. According to recent surveys, most members are
making progress in meeting the self-imposed goal of implementing
major reforms in derivatives markets. Only the United States
appears to have met all the reforms endorsed by the G-20 members
within the desired timeframe of year-end 2012. The European Union
(EU), Japan, Hong Kong, and the United States have each taken
significant steps towards implementing legislation requiring
central clearing. However, in most of these jurisdictions
legislation has not yet been followed up with technical
implementing regulations for the requirements to become effective,
according to the Financial Stability Board (FSB), which conducts
the surveys. Most authorities surveyed estimated that a significant
proportion of interest rate derivatives would be centrally cleared
by year-end 2012, but they were less confident of progress for
other asset classes. The EU appeared to be making progress in its
G-20 derivatives regulatory commitments, particularly in central
clearing and trade repository-reporting requirements, but at a
slower pace than the United States, according to the FSB. This may
be due in part to the need for legislation to be passed by
individual national legislatures even when agreed broadly by the
EU. As of October 2012, however, only the United States had adopted
legislation requiring standardized derivatives to be traded on
exchanges and electronic platforms. This report examines the G-20
recommendations for reforming OTC derivatives markets and presents
the result of self-assessment surveys measuring the performance of
G-20 members and some FSB members to date in meeting their
commitments. The Appendix to the report presents more detailed
information on the status of individual jurisdictions in
implementing the G-20- endorsed reforms. The Glossary defines key
international bodies and related financial terms and concepts.
General
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