Transparency study to be requested as part of March 1 derivatives industry commitments

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A working group of dealers and buy-side firms are to undertake a detailed study of pre- and post-trade transparency in over-the-counter derivatives as part of a set of commitments to be delivered to regulators on March 1.

The Federal Reserve Bank of New York hosted a meeting of 44 market participants, supervisors and industry associations on January 14, at which transparency issues were discussed alongside a broader review of the progress of central clearing and regulatory reporting.

Market participants and industry associations have been working furiously since that meeting, and particularly over the past fortnight, to finalise the commitments and deadlines that can realistically be included in the March 1 letter.

The letter is expected to set new deadlines on clearing, regulatory reporting and other operational issues for particular asset classes. On the issue of transparency, regulators admit it is too early to require specific commitments, but a study will be requested on what levels of transparency are currently available, what more could be done and what the implications would be.

The industry working group that has been appointed to gather that information, chaired by Deutsche Bank's Athanassios Diplas and Pimco's Bill De Leon, will be expected to make a very clear case to regulators and legislators on what can and can't be achieved.

If there was a requirement to start putting OTC derivatives into a reporting mechanism a few minutes after the transaction, that would have a massive impact on liquidity.

According to a number of dealers, there is currently a very acceptable level of pre-trade transparency available to derivatives end-users through a host of e-trading platforms. However, any move to report derivatives transactions to a public venue post-trade could compromise liquidity in the market. If dealers are forced to report large transactions undertaken with end-users, then they risk the market moving against them, making it much more difficult to hedge their positions.

"If there was a requirement to start putting OTC derivatives into a reporting mechanism a few minutes after the transaction, it would have a massive impact on liquidity. Banks might refrain from making trades because the reporting requirement could mean they wouldn't be able to hedge them in the market," says an interest rates trading infrastructure expert at one European bank.

But some observers believe it could be very difficult to dissuade regulators from imposing such transparency requirements on derivatives, no matter how strong the resistance from dealers happens to be.

"The problem for the industry is that transparency sounds like a good idea at the policy level and it is very hard to change the minds of politicians on this, even if it means higher prices or some impact on liquidity," says Simon Gleeson, partner in the international financial markets group at law firm Clifford Chance in London.

Market participants involved in the negotiations with regulators declined to divulge any detail on the contents of the March letter to the New York Fed. Alongside new commitments and deadlines, and the transparency study, the letter may also include a requirement for a separate study on standardisation.

"Standardisation is quite a nebulous idea, and when we talk about standardisation, there are concerns about whether we're forcing the OTC industry, which is there to react to bespoke requirements, into a product straitjacket," says one European banker involved in the negotiations.

 

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