Just before Christmas the UK Government published an important paper entitled Reforming OTC Derivative Markets - A UK perspective. As mentioned in the previous alert on it, this paper effectively set out the UK's view on the measures needed to be implemented to address systemic shortcomings in OTC derivative markets.

Since then the Committee on Payment and Settlement Systems and the Technical Committee of the International Organisation of Securities Commissions (CPSS-IOSCO) have launched a comprehensive review of their existing standards for financial market infrastructures such as payment systems and central counterparties (CCPs). Effectively in their review the Committees will revise three key sets of standards:

The Committees have stated that revised drafts of the standards will be available for public consultation in early 2011.

Back in the UK Lord Myners (Financial Services Secretary, HM Treasury) recently gave a speech at the AFME Market Liquidity Conference and effectively restated the UK Government's position as set out in the December paper. In particular Myners called on CCPs to be subject to "high global standards" and supported the CPSS-IOSCO review. He also urged the European Commission to align its proposals on the CPSS-IOSCO standards when it publishes the draft Markets Infrastructure Directive later this year.

One area that Myners wanted to see strengthened was the level and quality of CCP's capital. In the UK, CCPs and central securities depositories (CSDs) are currently required to hold sufficient capital to enable them to complete an orderly closure or transfer of their activities, which broadly equates to six months operating costs. According to Myners this could be adapted to explicitly cover operational, business and legal risks and to reflect the systemic importance of CCPs/CSDs.

Once revised standards are agreed they need to be consistently applied across the globe to avoid regulatory arbitrage. Myners reiterated the UK position that supervisory responsibility and authorisation should remain with the home state. However, there will need to be some confidence in the application of common standards across the globe. How this will be achieved in a meaningful way is a difficult question to answer.