Donhue on OTC ground rules

This article by the chairman of the Deposittory Trust & Clearing Corp. summarizes comments made by CME and ISDA representatives at the breakout panel discussion on derivatives at 2010 Booth Management conference: that regulated clearing must work through pricing and margining nuts and bolts faced by clearing houses:

:The necessary components of the solution are clear in proposals on both sides of the Atlantic. Standardise OTC derivatives, where possible. Where there is sufficient standardisation and liquidity, require the use of central counterparties to collect margin and guarantee trades. Ensurethat all OTC derivative trades are centrally reported to provide appropriate transparency to supervisors and to markets generally...

The value of a trade repository is that it has all the relevant trading data, including more detailed information that supports a thorough understanding of the net open interest relating to reference entities. It does this on a market-wide basis that allows it to provide the markets and regulators with a single view of risk from a central vantage point. Fulfilling these different perspectives in a global market is only achievable with a global source, regardless of the asset class involved.

Recognition of the importance of a single trade repository for each asset class has grown in Europe and the US. But some legislative proposals still stop short of recognising the full value of such repositories because these proposals only require a subset of data to be reported to them, in contrast to current market practice of reporting both cleared and uncleared trades to a repository.

If these proposals go ahead, they will fragment reporting and have the unintended consequence of preventing a comprehensive view of risk for regulators.

Global policymakers must be assured that the markets have access to a solution that addresses systemic risk concerns..."