OTC derivatives trade may be required to go through Central Bank
MOSCOW. Oct 28 (Interfax) - The Central Bank may require all trading in OTC derivatives to be conducted via the Central Bank, the bank's Financial Markets Service chief, Sergei Shvetsov, told journalists on Monday.
The Moscow Exchange on Monday kicked off a new market, the Standardized OTC Derivatives Market, to provide for clearing deals in derivatives.
But under its G20 commitments, Russia must require that the OTC derivatives trade be conducted through the Central Bank beginning on January 1, 2013. "As with many other countries, we are at the stage of preparing for this decision," Shvetsov said.
"Eighteen months: that is roughly the time in which we can come out with requirements for certain classes of deals," he said.
A plan for phasing in the requirements might be devised, particularly mandatory margin requirements for deals transacted outside the Central Bank. In addition, the Central Bank could use capital adequacy requirements to create an environment where OTC derivatives deals outside the Central Bank would be impossible.
However, the division of responsibility between the Central Bank and National Clearing Center (NCC) would depend on the market situation. "If the stress level on the market is lower than prescribed by the regulator, then the entire responsibility for the system of risk management resides with NCC. If the stress level is unusual and exceeds the parameters set by the regulator, then the regulator might, in one form or another, employ non-traditional instruments for supporting the Central Bank," he said.
Such a mechanism would make the system stable and allow the market to develop.
NCC must manage on its own up to a certain level, based on a certain "stress scenario," he said. "This scenario is the crux of the agreement between NCC and the Central Bank."
When the actual market level exceeds that contained in the stress scenario, the regulator must step in order to rescue the market, for example, purchasing the collateral held by NCC. "The Central Bank might in some special forms support liquidity of those assets in the hands of NCC," Shvetsov said.