ESA Proposes Changes to OTC Derivatives Regulation

This Friday the European Supervisory Authorities Authority (ESAs) launched two consultations regarding Regulatory Technical Standards (RTS) for non-cleared over-the-counter (OTC) derivatives. The two consultation papers propose amendments to RTS regarding the clearing obligation and risk mitigation techniques for non-cleared OTC derivatives.

In one of the consultation papers, the ESAs proposes amendments to clearing obligation regulation. Currently, financial counterparties, such as banks or asset managers, and non-financial counterparties, which includes any EU firm holding a specific number of positions in OTC derivative contracts, are forced to centrally clear certain classes of over-the-counter (OTC) derivative contracts through central counterparty clearing (CCPs).

The purpose of this Regulation Regulation Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Read this Term was to reduce the level of counterparty risk posed by non-cleared OTC derivative trading. Now, however, the ESAs is suggesting specific strategies may reduce counterparty risk so as to make those using them exempt from the clearing obligation.

The consultation paper notes that those using covered bonds or securitizations can provide sufficient coverage against counterparty risk. As such, those holding either covered bonds or securitizations may no longer be subject to clearing obligations in the future.

Risk Mitigation and Securitizations

The ESAs' other consultation paper follows a similar trend. It proposes extending exemptions to risk mitigation techniques set out by the RTS to cover securitizations.

Currently, the use of covered bonds is an accepted part of the RTS’ risk mitigation strategy. Securitisations, on the other hand, are not. Today’s paper notes that the counterparty Risk Management Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, Read this Term strategies used with securitizations are almost identical to those used with covered bonds. As such, the ESAs are suggesting that using securitizations becomes an accepted part of the RTS risk mitigation strategy.

The consultation period set out by today’s release will last until the 15th of June 2018. Firms will have until then to provide feedback on the reports. There will also be a public hearing to discuss the proposed changes at the European Banking Authority on 31st of May 2018, from 15.00 to 16.00 UK time.