Guidance on the application of the 2004 CPSS-IOSCO Recommendations for Central Counterparties to OTC derivatives CCPs - consultative report

May 2010

This report, prepared by a working group (WG) jointly established in June 2009 by the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO), presents guidance on the application of the 2004 CPSS-IOSCO Recommendations for Central Counterparties (RCCP) to the CCPs clearing over-the-counter (OTC) derivatives products (OTC derivatives CCPs).

Over the past several years, public and private sector entities have undertaken a coordinated effort to improve the post-trade infrastructure for OTC derivatives transactions. The recent financial crisis demonstrated the need to further enhance the safety and transparency in the OTC derivatives markets. As a result, authorities in many jurisdictions have set out several important policy initiatives encouraging greater use of CCPs for OTC derivatives markets. The CPSS and the Technical Committee of IOSCO support these positive developments.

A well designed CCP can reduce the risks and uncertainties faced by market participants and contribute to the goal of financial stability. Nevertheless, because of the complex risk characteristics and market design of OTC derivatives products, clearing them safely and efficiently through a CCP presents unique challenges that clearing listed or cash-market products may not. These aspects were not fully discussed in the 2004 report of the existing RCCP. Consequently, applying the RCCP to newly established OTC derivatives CCPs in practice has involved a considerable degree of interpretation and judgment. The WG reviewed the RCCP in light of these experiences and identified key new issues that arise when a CCP provides clearing services for OTC derivatives. With the aim of promoting consistent interpretation, understanding and implementation of the RCCP across arrangements for OTC derivatives transactions, the WG has developed guidance tailored to unique characteristics of OTC derivatives products and markets, which is presented in this report.

The recent financial crisis highlighted a severe lack of market transparency in OTC derivatives markets. As an important step in addressing this issue, OTC derivatives market participants, with the support of the regulatory community, are committed to establishing and making use of trade repositories (TRs) for OTC derivatives markets. A TR for OTC derivatives is a centralised registry that maintains an electronic database of open OTC derivative transaction records. In light of the growing importance of TRs in enhancing market transparency and supporting clearing and settlement arrangements for OTC derivatives transactions, the WG also developed a set of factors that should be considered by TRs in designing and operating their services and by relevant authorities in regulating and overseeing TRs, which has been published for consultation separately. These two sets of policy guidance are complementary and, taken together, constitute an important part of the responses of the CPSS and IOSCO to the recommendations of the G20 that called for the strengthening of the robustness of the OTC derivatives market.

The CPSS and the Technical Committee of IOSCO are grateful to the members of the working group and its Co-Chairs, Daniela Russo of the European Central Bank and Jeffrey Mooney of the US Securities and Exchange Commission, for their excellent work in preparing this report.