5.1 Problem

Improving the transparency and resilience of OTC derivative markets is one of the four key workstreams on the G20 financial regulation agenda. 1

The global financial crisis exposed failures in the supervision of derivatives markets. Large volumes of outstanding bilateral transactions had created a complex and deeply interdependent network of exposures that ultimately contributed to a build up of systemic risk. The stresses of the crisis exposed a number of risks:

  • insufficient transparency regarding counterparty exposures;
  • inadequate collateralisation practices;
  • cumbersome operational processes;
  • uncoordinated default management; and
  • market misconduct concerns.

In response, the G20 Leaders agreed to reform OTC derivatives markets with the objectives of improving transparency, mitigating systemic risk, and protecting against market abuse.

The G20 has agreed rules requiring OTC derivatives to be traded on exchanges or electronic platforms where appropriate, cleared through central counterparties, for transactions to be reported to trade repositories, and applying higher capital requirements to bilateral derivative contracts.

  1. The others being: strengthening the resilience of financial institutions (including through stronger capital and liquidity buffers and better incentives for risk management);
    addressing the problem of ‘too big to fail’ (especially through improved arrangements to ensure institutions can be resolved with minimal disruption to the broader financial system); and
    enhancing the regulation and oversight of the shadow banking sector.