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World Federation of Exchanges urges international regulatory bodies to modify capital standards for exchange traded derivatives in support of G20 reforms

Tuesday, November 27, 2012
Opalesque Industry Update: The World Federation of Exchanges (WFE), representing 59 publicly regulated stock, futures, and options exchanges and associated clearinghouses, today called on international regulatory bodies to modify capital standards to appropriately reflect the liquidity and efficiency of exchange traded derivative (ETD) markets. In a letter to the Financial Stability Board and other policy organizations, WFE encouraged global standard setting bodies to demonstrate continued support for the G20 commitments to bring greater transparency and central clearing to derivative markets by ensuring that the costs of ETD markets are not unnecessarily increased.

The Basel Committee on Banking Supervision (BCBS) has issued an Interim Capital Standards proposal that “seeks to apply a blanket 5-day margin period or risk standard to highly liquid and transparent ETDs,” the WFE says in a letter from Hüseyin Erkan, Chief Executive Officer, and Jorge Alegria, Chairman of the International Options Markets Association (IOMA) which is the WFE’s global association of options and futures exchange leaders.

If adopted by the BCBS and implemented by national bank regulators, the 5-day capital standard would conflict with current margin standards for highly liquid ETDs, resulting in increasing costs for users of exchange-traded markets. “This may force exchange users (e.g. manufacturers, food producers, employee pension funds, and investors) to either discontinue critical hedging practices or move activity to the less transparent OTC derivative markets. Such outcomes would clearly undermine the G20 OTC market reform commitments,” the WFE letter states.

The Financial Stability Board (FSB), an international body established by the G-20 nations in 2009 after the global financial crisis, is working in coordination with other international organizations such as the International Organization of Securities Commissions (IOSCO) and the Basel Committee on Banking Supervision (BCBS) to develop global capital and margin standards for both exchange traded and “over-the-counter” (OTC) derivative instruments. “The WFE respectfully requests global standard setters to eliminate the 5-day margin period of risk banking capital standard for exchange traded derivatives and demonstrate international support for the more appropriate current standards for the highly liquid, transparent, and efficient exchange traded derivative markets. Such action by global standard setters will be instrumental in advancing the G20’s commitment to bring increased transparency and the safety and soundness of central clearing to the global derivatives market and broader financial system.”

The full letter from WFE to the five regulatory bodies may be viewed here.

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