PANGLAO—Emerging markets, like the Philippines, called on the Financial Stability Board (FSB) for a targeted, rather than a one-size-fits-all, approach in reworking the rules governing so-called over-the-counter (OTC) trade of derivative instruments, such as options and swaps.
This surfaced at the meeting of the Regional Consultative Group (RCG) for Asia working under FSB and hosted this year by Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. The FSB is a five-year-old watchdog created by the G-20, or the world’s richest nations, monitoring the activities of the global financial system.
Tetangco said regulators agree that, while there should be more transparency involved in how derivatives instruments, like swaps and options, are traded around the world at the moment, lumping the reforms more appropriate for developed-market participants with those of emerging-market economies are difficult to digest.
Emerging-market regulators acknowledge the financial instruments in question that are traded OTC at present do not pass through an organized and well-regulated exchange platform, as do run-of-the-mill government- or privately issued bonds and equity instruments.
Tetangco said the emerging-market regulators were of the consensus that the reform measures brought to bear on OTC-driven swap transactions ought to be tailor-fitted to particular economies.
At the two-day FSB workshop and meeting in Panglao, Bohol, financial authorities from around the region agreed the reforms on the OTC options, and swaps must recognize the extent or size of these transactions in the countries they are found.
OTC derivatives are financial instruments that are traded sans the benefit of regulation, as transactions happen over the phone and not via formal exchange platforms, like stock exchanges. The instruments are mostly interest-rate-related swaps or foreign-exchange swaps. Consenting parties trade OTC derivatives for hedging purposes, or to reduce the risk of price, exchange- or interest-rate movements in the financial instruments they own.
Some five years earlier, G-20 leaders agreed to reform the essentially unregulated derivatives trade market to improve transparency. The global derivatives market is estimated to be worth 20 times the global output, or gross domestic product.
The proposed reforms include, among others, a more intense reporting of OTC derivatives and the establishment of electronic trading platforms.