UK authorities propose measures on OTC derivatives

December 16, 2009

LONDON, Dec 16 (Reuters) — Britain’s Treasury and Financial Services Authority proposed regulatory measures for over-the-counter derivative products on Wednesday, including higher capital charges for non-centrally-cleared trades.

The authorities published a paper to identify steps to address problems in management of counterparty risk and a lack of transparency in derivatives markets highlighted by the financial crisis.

“Given the importance of OTC markets to the UK economy (43 percent of the global OTC market is located in the UK), the UK has been leading the analysis of how these issues might be addressed,” the report said.

The report included calls for greater standardisation of derivatives contracts, for registration of all derivatives in trade repositories and for international agreement on which derivatives products should be clearing-eligible.

The authorities also said capital charges for banks and investors should “reflect appropriately the risks posed to financial systems. These should be higher for non-centrally cleared trades”.

The report said the approach may differ for non-financial firms “given the different nature of the risks they pose”.

The report cited the liquidity squeeze at insurer AIG as evidence of weaknesses in managing counterparty risk and said the failure of Lehman Brothers showed OTC exposures were not sufficiently transparent to market players or regulators, leading to an unwillingness to trade.

It said the authorities saw no need at this stage to require trading of standardised derivatives on exchanges. ((, Reuters Messaging:, +442075422471))

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