H R Khan: Regulation of Indian debt & derivatives markets - some
perspectives on post-crisis paradigm
Keynote address by Mr H R Khan, Deputy Governor of the Reserve Bank of India, at the
15th FIMMDA-PDAI Annual Conference, Jaipur, 8 March 2014.
* * *
The speaker acknowledges the contribution of Shri N.R.V.V.M.K Rajendra Kumar, Shri Sudarsana Sahoo and
Shri Surajit Bose of the Reserve Bank of India.
1. Shri. N. S. Venkatesh, Chairman, Fixed Income Money Market Derivatives Association
(FIMMDA), Shri B. Prasanna, Chairman, Primary Dealers Association of India (PDAI), Sri.
C.E.S. Azariah, outgoing Chief Executive Officer and Shri Prasad, incoming CEO of the
FIMMDA, distinguished speakers and panellists and delegates to the conference. It gives me
immense pleasure to be amidst you all for the 15th annual meeting of the FIMMDA and the
PDAI in this beautiful, historic city of Jaipur. After holding meeting overseas for some years,
holding the meeting here is like home coming. Jaipur with its majestic forts and palaces,
archaeological monuments and beautiful gardens provides appropriate ambience for the
bond and derivatives dealers to reflect on the very topical subject of the conference: Risk,
Regulation & Opportunities in Globalised Markets. I would like to compliment the organizers
for very thoughtfully choosing the session themes covering dynamics of Impossible Trinity in
the context of the EMEs, liquidity risk and capital requirements under the Basel framework,
regulations relating to Financial Market Infrastructures (FMIs) and current issues and
challenges in the financial market development and the eminent panellists. By way of
background to some of the issues that would be discussed in these sessions, I would like to
share some perspectives on regulations of Indian debt and derivatives markets in the recent
times in the context of post-crisis paradigm.
I. Why do we need regulation?
I.I Importance of regulation for markets
2. Wayne Byres, Secretary General, Basel Committee on Banking Supervision (BCBS)
described financial market participants as "glass half full" people, and regulators as their
"glass half empty" counterparts. The reason for such description is that market participants
will first see opportunity for reward whereas regulators will first see exposure to risk. The two
perspectives are different sides of the same coin and are essential for development of
financial markets and, by extension, development of the real economy. The operation of an
efficient financial sector is dependent on efficient financial regulation. The recent financial
crisis has amply demonstrated the need for effective regulation.
3. The financial crisis has been triggered by actions of financial firms motivated by incentives
which were misaligned with the requirements of financial stability. The regulators were not
able to accurately gauge the impact of the actions of financial firms, whether they are
subprime lenders or dealers in complex derivatives, leading to a crisis of humongous magnitude.
The "free markets paradigm", which emphasized the efficiency and self-correcting nature of
markets, has been found inadequate. The build-up of systemic vulnerabilities arising from
excess liquidity, leverage, risk-taking and interconnectedness across the financial system
was not detected by regulators. The crisis has in a sense changed the global regulatory
landscape dramatically.
4. Besides taking monetary and fiscal steps intended to restore market confidence and help
economic recovery from the crisis, the policy makers have also shown determination to
introduce new financial regulations in an attempt to mitigate the impact of such crisis in
future. The regulatory reform is therefore focused on strengthening micro-prudential and
market-conduct regulation supplemented with focus on build-up of systemic risks.
5. As the crisis spread to the developed countries, interconnectedness of global finance
highlighted need for coordination of regulation at the global level, prompting G-20 countries
to launch a coordinated and concerted regulatory reform initiative. G-20 also emphasized on
effective enforcement of regulation which should be coordinated internationally so that
national authorities and international standard setters work together and assist each other in
strengthening financial regulatory and oversight frameworks. G-20 has recognised that
regulatory reform requires enhancements to a range of supporting policies and infrastructure,
including compensation practices that promote prudent risk taking; the greater
standardization of derivatives contracts and the use of risk-proofed central counterparties
(CCPs); improved accounting standards that better recognize loan-loss provisions and
dampen adverse dynamics associated with fair-value accounting. At the global level, strict
new rules on capital, liquidity and leverage have been designed so as to ensure that there
are sizable buffers available in the system as cushion against event of failure and the risks
assumed by the financial firms are limited.
6. In the advanced economies, comprehensive regulatory reforms have been ushered in key
areas through legislation (e.g. passage of Dodd-Frank Act in US) and comprehensive review
(e.g. Vickers review of banking system in United Kingdom). The global scale of crisis and the
complex financial system with entities straddling across national jurisdictions necessitated
coordinated regulatory action through international agencies, and the G20 has therefore
taken an enhanced role in shaping international financial regulatory arrangements.
I.II Global Initiatives on regulation
7. The new regulatory initiatives are intended to be both more intrusive in their impact on the
financial sector than the "light touch" approach to regulation and supervision that prevailed -
particularly in some jurisdictions - before the crisis, and they are also designed to be much
broader in scope. They cover not only capital and liquidity required by financial institutions
(e.g. Basel III), but also market activities, financial instruments, infrastructure, and
benchmarks [e.g. Markets in Financial Instruments Directive (MiFID-II), Markets in Financial
Instruments Regulation (MiFIR), European Market Infrastructure Regulation (EMIR),
European Commission's proposed Regulation on indices used as benchmarks in financial
instruments and financial contracts]. The cost to the industry for complying with these new
regulations is certain to be high, but it is outweighed by the potential benefit of a stable
financial system.
I.III Financial market regulation - the Indian perspective
8. Reserve Bank of India is the regulator of Money, G-Sec and OTC credit, foreign exchange
and interest rate derivatives including Repo. In pursuit of the regulatory mandate, the
Reserve Bank has been endeavouring to develop broad and deep markets. Deeper and
broader financial markets serve important public policy objectives in terms of improving the
efficiency of capital allocation and absorbing the risks entailed in financing growth. As sound
regulation is an essential institutional factor to ensure market development, Reserve Bank
has been focussing on prudent regulations for furthering the development of Money, G-Sec
and OTC derivatives markets. Reforms in the G-Sec market carried out since the early 90s
have ensured that the G-Sec market is a well-organized and regulated market with world
class market infrastructure for trading and settlement.
9. Reserve Bank of India's approach to regulation and development of the financial markets
has been guided by three broad principles.
i. First, the menu of financial products available to enable economic agents to hedge
emergent risks and meet their funding requirements should be widened.
ii. Second, the introduction of new products should follow a graduated process guided
by the acceptance of the product by market participants.
iii. Lastly, the robustness of the market infrastructure for trading, settlement and
reporting of existing as well as new financial products should be improved.
From the outset, India has resolved to attain standards of international best practice but the
endeavour has been to fine tune the process keeping in view the underlying structural,
institutional and operational issues.
10. The philosophy behind such policy action is preference for safety and stability of the
financial system over the considerations of short term market activity. This was well
articulated by Governor Dr. Raghuram Rajan that Reserve Bank of India's policy focus is to
broaden and deepen financial markets and increase their liquidity and resilience so that they
can help allocate and absorb the risks entailed in financing India's growth. Efforts of Reserve
Bank has been to strike a balance between market development and financial stability.
11. We can describe our regulatory and developmental measures for the debt and
derivatives markets under two broad focus areas - building resilience and increasing
liquidity.
II. Building resilience of debt & derivatives markets
12. Safe and sound markets ensure financial stability and orderly market development. The
resilience of financial markets is ensured by the Reserve Bank of India mandating
requirements for registration and reporting, requirements for capital and collateral and orderly
market rules.
II.I Requirements for registration & reporting
13. The requirements of registration ensure that safe and financially strong entities have
access to the financial system. For instance, Reserve Bank's guidelines for authorization of
Primary Dealers (PDs) prescribe that besides financials, experience in the financial sector
and commitment to serve the market including retail/mid-segment participants are required
for becoming a PD. The reporting requirements foster transparency, market integrity as well
as discipline. Lack of transparency has often been cited as a major reason for global financial
crisis. In India, Reserve Bank has taken several steps to improve transparency through
mandated reporting requirements. G-Sec trades are captured by the anonymous trading
platform owned by the Reserve Bank (Negotiated Dealing System- Order Matching
[NDSOM]). All OTC outright and repo transactions in G-sec and Call/Notice/Term money
transactions are reported to CCIL. Commercial Paper/Certificate of Deposit trades are
reported on FIMMDA's reporting platform. Comprehensive OTC Derivative trade reporting is
in place.
II.II Requirements for capital and collateral
14. Requirements of capital and collateral are prudential in nature and ensure that the market
participants do not take undue counterparty risks while trading in the market. Capital
requirements act as buffer against various risks including credit and market risks. Indian
banks have been well capitalised and have been conforming to the international best
practices with regard to bank capital as delineated by the Basel prescriptions. We have
announced migration to Basel III to strengthen the banks' capital base and improve their
ability to withstand systemic shocks. The norms would come into effect in a phased manner.
We are in the process of revamping capital adequacy standards of standalone primary
dealers on lines of Basel III framework. Collateral requirements reduce counterparty risk in
market transactions. The international consensus on sound regulation for OTC derivatives as
articulated by G20 declaration for moving these derivatives to central clearing and mandatory
posting of margins emphasizes the importance attached to collateral. In India collateral
protocols are available for G-sec, repo and equity markets. We are in the process of
operationalising similar dispensation in OTC derivatives markets.
II.III Orderly market rules
15. In order to protect the integrity of market prices so that they provide credible price
information and encourage wider market participation, orderly market rules are put in place
by the regulators. These rules need not necessarily be prescribed by the regulator itself
rather they could evolve through consensus among market participants. FIMMDA's Code of
Conduct is an example in this regard. FIMMDA has also constituted a Dispute Resolution
Committee recently with wider representation of varied market participants to resolve the
disputes arising out of erroneous trades in the government securities market. Wherever gaps
are seen, the market regulator steps in to ensure orderly conduct. Financial stability concerns
have been the prime motive behind such actions. Rules prescribed by the Reserve Bank,
such as, the users of CDS to buy them only with underlying exposure; placing appropriate
limits on short selling; ensuring consumer protection by measures that would curb mis-selling
with emphasis on "appropriateness & suitability"; placing appropriate limits on interest rate
futures positions, etc. must be seen in this perspective. One can say that the approach has
served Indian financial markets well as India was relatively unscathed from the contagion
effects of global financial crisis.
III. Enhancing liquidity in debt & derivatives markets
16. Liquid debt markets are essential for both issuers and investors. In the recent years
concerted efforts have been made to improve liquidity in debt markets. There have been
regular issuances across yield curve, which spans up to 30 years, safe and efficient
settlement system with world class infrastructure, a state of art trading system that enables
anonymous order matching and a liquid repo market that offers funding options. Hedging and
trading instrument are available to enable market participants to freely express their views.
Investor base of domestic and foreign investors is expanding and various instruments are
being offered to cater to the needs of investors. Though liquidity has improved in G-sec
market, the number of securities traded continues to be low. Liquidity is patchy and bonds
are traded at a few points, especially at 10 year maturity. The concentration has increased
during recent years even though issuances have been spread across the curve and critical
mass required for liquidity is built through re-issuances. Liquidity remains a function of bear
and bull phases and we see exuberance during bull runs and freezes during a bear phase.
We have seen volumes touching over one lakh crore and plummeting to
10,000-15,000 crore.
17. In the recent period, implementing recommendations of the Working Group on Enhancing
Liquidity in the Government Securities and Interest Rate Derivatives Markets (Chairman: Shri
R. Gandhi) (Gandhi Working Group) has been the priority of the Reserve Bank. Action has
been initiated/completed in nearly 70% of the recommendations. The recommendations,
such as, truncating the time window for bidding in the primary auction; changing the
settlement cycle of primary auctions in Treasury Bills (T-Bills) from T+2 to T+1; conduct of
primary auctions in G-Sec as a mix of both uniform-price and multiple price formats and
reissuances of existing securities in state development loans; standardizing interest rate swap
(IRS) contracts to facilitate centralized clearing and settlement of these contracts; and
migration of secondary market reporting of over-the-counter (OTC) trades in G-Sec (outright
and repo) from PDO-NDS to NDS-OM and CROMS, respectively, have been implemented.
18. Further measures include issuance of Inflation Indexed bonds for institutional as well as
retail/ individual investors and, introduction of cash settled 10-year Interest Rate Futures.
Steps towards active debt management have been taken by undertaking debt switch of
securities from 2014-15 and 2015-16 maturity buckets for face value of about
27,000 crore to longer tenor security. All such initiatives have been taken after extensive
market consultations and taking into account the feedback received.
19. It is our expectation that market participants would actively participate in the debt markets
and improve liquidity. In this regard, I would discuss about two issues that would have a
bearing on liquidity viz. market making and short selling.
III.I Market making
20. Primary Dealers are mandated to make markets in G-sec and provide liquidity. There is
scope for improvement in market making efforts of PDs. Gandhi Working Group has
recommended that one of the ways for improving liquidity is to consider allocating specific
securities to each PD for market making in them and if required, rotate the stock of securities
among the PDs, by turn, at periodic intervals. This would ensure continuous availability of
prices for a select group of securities. Reserve Bank is in consultation with the PDAI and the
Government to operationalise this recommendation. It is expected that vigorous efforts will
be made by the PDs to provide two way quotes for sufficiently high number of securities to
develop liquidity in the market. We plan to operationalise the market making scheme in the
next fiscal and expect significant improvement in liquidity. In this context, the present annual
minimum turnover ratios of 5 times for Government dated securities and 10 times for
T-Bills/CMBs of the average month-end stocks need to reviewed and suitably revised to a
higher level.
III.II Short selling
21. The Reserve Bank has allowed short selling in G-sec to enable market participants to
express interest rate views. Best practice in regulation demands that short selling should be
subject to appropriate controls so as to reduce or minimise the potential risks that could
affect the orderly and efficient functioning and stability of financial markets and be subject to
a reporting regime that provides timely information to the regulators. Short selling was
permitted in a sequential manner to enable market participants to take positions based on
emergent interest rate scenarios and cap risks that could emanate from increased short
selling. Intraday short selling in G-Sec was permitted in 2006; it was extended to five days in
2007 and then to three months in 2011. Participant-level quantitative limits (0.25 per cent and
0.50 per cent of the outstanding amount respectively for illiquid and liquid securities) have
also been prescribed on the short positions to obviate risk of "squeeze" in the securities and
cap the overall risk in the market due to short selling. Appropriate reporting requirements
have been prescribed to enable regulators to monitor the build-up of risks in the market.
Some market participants expressed view that these regulations are limiting the freedom to
express interest rate views and sought a much more liberal regime. The recent regulatory
action on limiting short sale in American and European markets underscores the need for
appropriate regulation of short selling. Reserve Bank is, however, constantly reviewing its
policy and would consider further relaxations keeping in view the needs of market
participants and imperatives of financial stability.
22. In the context of liquidity, I would like to make a broader point which market bodies like
FIMMDA & the market participants need to ponder over. Liquidity, like many other market
concepts, is a self-fulfilling one. An instrument is as liquid as the participants believe it to be.
If more participants believe that an instrument is liquid and evince buying interest, it
"becomes" liquid. While the product design, trading systems, regulatory dispensations, etc.
do have an impact on the liquidity of an instrument, more importantly, it is the activity by the
participants that makes the instrument liquid. All it requires is a few participants taking the
first step. While we have certain market segments which boast of sizeable trading volume
and wider participation, there is a significant skewness in other market segments. It is
everybody's interest that we make the markets broad and deep. Just to remind - it is the
market-participants that make markets and regulators can only play a facilitator's role.
IV. Recent measures
23. I would briefly summarize recent developments with regard to G-Sec, Corporate Bond,
money and derivatives markets.
IV.I Interest rate futures
24. As announced in the Second Quarter Review of Monetary Policy 2013-14, the Reserve
Bank permitted cash settled Interest Rate Futures (IRF) on 10-year Government of India
security after extensive consultations with stakeholders. The IRF is unique in design as
settlement price is based on a single benchmark bond. The instrument is currently trading on
three exchanges. The trading volume, which was very encouraging on the first few days of
the introduction, has tapered thereafter. The participation is also subdued as many of the
banks are yet to start using the product. The product helps in better management of interest
rate risks and market participants can make use of the same. Going forward, based on the
experience gained and assessment of the market demand, we can consider similar cash
settled interest rate futures on benchmark securities, money market futures, etc.
IV.II Term repo
25. Reserve Bank introduced variable rate term repo facility in October 2013 to provide
market participants with additional access to primary liquidity as well as impart greater
flexibility in managing their reserve requirements. The reduced reliance on overnight funds
by the banks would hopefully encourage them to actively transact in the term money market,
paving the way for development of a liquid term money market. The term repo is now
available up to 28 day tenor. Keeping in view the overall liquidity conditions in the banking
system, going forward, Reserve Bank may appropriately extend the tenor and nature of term
repos.
IV.III CP CD markets
26. Reserve Bank of India has introduced DvP-I based settlement of all OTC transactions in
Certificates of Deposit (CDs) and Commercial Papers (CPs) on the lines of the arrangement
already existing in case of settlement of OTC trades in corporate bonds to eliminate the
settlement risk. Guidelines on CPs have been comprehensively reviewed. Changes
introduced includes changing minimum rating requirement for CP issuance to A3, allowing
buy-back of CP through the secondary market and at prevailing market price, etc. With
regard to CDs, I would like to mention a rather disturbing phenomenon, which I would term
as "March Rush". It has been observed for some time that banks raise deposits at exorbitant
cost to inflate balance sheets. While this may spruce up appearance of bank's financials, it
would have a deleterious impact on money market rates, creating avoidable stress. I suggest
that FIMMDA may engage with banks and take steps to avoid such stress.
IV.IV Repo in corporate debt
27. To widen the participant base in corporate bond repo market, Scheduled Urban
Cooperative banks have been permitted to participate in the instrument. To encourage
activity in corporate bond repo, eligible category of collateral has been expanded to include
short term instruments like CPs, CDs and NCDs and minimum haircut requirement has been
further reduced. There is, however, no activity in the corporate bond repo markets. Progress
in signing Global Market Repo Agreement (GMRA) is slow. I request FIMMDA to advise its
members to sign GMRA to enable trading in corporate bond repo. In case the progress
continues to be slow, Reserve Bank would examine the option of mandating signing of
GMRA as a market development measure.
V. Emerging issues
28. I would like to share my thoughts on some of the emerging issues that require deeper
deliberations as this is the right forum to exercise our minds on these issues as they are
likely to have financial system wide impact. It could be very informative to have the market
participants' views on these issues. The issues include enhancing investment limit for
foreigners in our debt markets, debate over appropriate benchmarks and their regulation,
issues emerging out of G-20 declaration on OTC derivatives, legal issues relating to bilateral
netting, and extraterritorial application of certain laws enacted in developed countries.
V.I Enhancing foreign investment limits in G-Sec and corporate bonds
29. Pursuing our policy of enhancing foreign investment in domestic financial markets in a
calibrated and gradual manner, the total limit for foreign investment in Government Securities
has been increased over a period of time to the current limit of USD 30 billion. While being
sensitive to the demand for opening markets to foreign investors, the risk-reward trade off
needs to be carefully examined. The imperatives of widening and diversifying investor base
leading to higher demands for debt instruments need to be kept in view along with the
considerations about financial stability and insulation from sudden-stop risks. Going forward
our focus would be on encouraging participation of long term investors in our debt markets
and reducing the availability of short-term debt instruments for foreign investors who often
act as "investment tourists", particularly during period of stress.
V.II Financial benchmarks
30. The benchmark rates/indices in the financial markets are in the nature of "public goods".
They serve as common reference points for pricing of financial instruments. Any attempted
manipulation of the benchmarks not only erodes their credibility but also poses serious threat
to stability of the financial system as large volume of financial contracts are referenced to the
widely used benchmarks. The benchmark rate setting process, therefore, has to be robust
with strong governance standards for maintaining the credibility and reliability of the
benchmarks. The recent scandals relating to manipulation of several key global benchmarks,
viz. LIBOR, EURIBOR, TIBOR, London 4 PM FX fixing, etc., have severely impaired the trust
of the international community on the financial benchmarks. Regulators and public authorities
in several jurisdictions have conducted wide ranging probes involving many major
benchmarks and have penalised several banks and brokerage firms for their misconduct.
The probes are still on.
31. Meanwhile, various international standard setting bodies, central banks and market
regulators have undertaken comprehensive review of the existing benchmark setting system
and recommended several reform measures for restoring the credibility of the financial
benchmarks. Such reform measures have been undertaken/underway in many jurisdictions.
To mention a few major ones; the LIBOR has been notified as a regulated activity under
FSMA (Financial Services and Markets Act 2000) since April 2, 2013 with provisions for
criminal sanctions for manipulation of the benchmark. The administration of LIBOR has
recently been transferred to the Intercontinental Exchange Group (ICE) Benchmark
Administration Limited. The European Commission has issued the draft legislation for
regulation of financial benchmarks in the Euro region. The Administrator of EURIBOR, viz.
EURIBOR-European Banking Federation, has taken several measures to strengthen the
governance framework including reducing the representation of the panel banks in the
steering committee to minority. The Japanese Banking Association, the administrator of
TIBOR, has announced forming a new entity for calculation and publication of TIBOR. The
Monetary Authority of Singapore (MAS) has issued proposed regulations of the financial
benchmarks containing stringent provisions, such as, licensing of administrators and
submitters, designation of key benchmarks, criminal and civil sanction for benchmark
manipulations, etc.
32. We have initiated similar action in India also. As you all know, the Reserve Bank of
India's Committee on Financial Benchmarks (Chairman: Shri P Vijaya Bhaskar) (Vijaya
Bhaskar Committee) have submitted its final Report recently. It has recommended several
measures for strengthening the governance framework and setting methodology of major
Indian Rupee interest rate and foreign exchange benchmarks. Although methodologies used
for determination of major Indian benchmarks were found generally satisfactory by the
Committee, it has recommended for bringing in several improvements on the lines of
international developments. Wherever possible, the benchmark calculation is to be based on
observable transactions subject to appropriate threshold. Overnight MIBOR fixing is to be
shifted from the existing polling method to volume weighted average of call trades. On the
governance of the benchmarks, the Committee has recommended several measures for
strengthening the governance frameworks with the benchmark administrators, calculation
agents as well as the submitters. Governance structure of FIMMDA and FEDAI with their
Boards comprising directors from their member institutions could entail conflicts of interest in
the context of benchmark settings. As recommended by the Committee, it would be
appropriate for the FIMMDA and FEDAI to create a separate independent structure, either
jointly or separately, for administration of the benchmarks. Further, I would like to urge
FIMMDA and FEDAI to complete the reality self-check of their governance framework
vis-àvis the recommended principles within timeline of three months suggested by the Committee
and inform the Reserve Bank for further consideration. They should also initiate necessary
actions to strengthen the benchmark setting methodologies. I may also make a mention that
it would be highly desirable to enforce some degree of supervisory oversight over the
benchmarks as recommended by the Committee. Reserve Bank is currently examining the
recommendations of the Committee for implementation.
V.III Valuation of state development loans
33. While on the subject of valuation and benchmarks, I would like to briefly discuss pricing
and valuation of State Development Loans (SDLs). Historically, the SDLs are valued at
25 basis points over similar tenor Government of India security. This heuristic yardstick is not
in line with best practice and Gandhi Working Group has recommended that the valuation
methodology for SDLs may be reviewed. Subsequently, Vijaya Bhaskar Committee has
reiterated the suggestion. While examination of these recommendations is underway and no
policy decision is taken as yet, I would like to highlight that pricing of SDL by market
participants does not seem to be in line with the nature of the instrument. How can one
explain the pricing of SDL at spreads higher than those of highest rated corporate bonds
when state governments are sovereigns and carry absolutely no default risk? SDLs are
eligible investment for SLR requirement of the banks and carry Zero risk weight.
Furthermore, SDLs are eligible investment for institutional investors, such as, insurance
companies and pension funds as per the investment guidelines laid down by their respective
regulators. The states have initiated fiscal reforms and all of them have enacted fiscal
responsibility legislation. Their fiscal health has been relatively better than the Central
Government as States, at the aggregate level, have recorded revenue surplus. During
2012-13, twenty three states recorded revenue surplus. Reserve Bank of India is the banker
and debt manager for the states. It has been taking steps to improve liquidity in SDLs by
announcing quarterly indicative quantum, limited re-issuances, etc. SDLs have been made
LAF/market repo eligible. In view of the above, it seems odd for the market to charge for
large risk premium while pricing SDLs. The pricing anomaly needs to be looked at seriously.
For market integrity, the price must reflect true value of the bond and valuation must reflect
the market reality.
V.IV OTC derivatives market reforms
34. In September 2009, G-20 leaders declared in Pittsburgh that all standardised OTC
derivative contracts should be traded on exchanges or electronic trading platforms, where
appropriate, and cleared through central counterparties (CCPs) by end-2012 at the latest;
OTC derivative contracts should be reported to trade repositories and non-centrally cleared
contracts should be subject to higher capital requirements. In 2011, the G20 Leaders agreed
to add margin requirements on non-centrally-cleared derivatives to the reform programme.
Some progress has been achieved in accomplishment of regulatory reform. The Financial
Stability Board (FSB) estimated that approximately 10 per cent of outstanding credit default
swaps and approximately 40 per cent of outstanding interest rate derivatives were centrally
cleared as of end-August 2012. It also estimated that well over 90 per cent of OTC interest
rate and credit derivative contracts are being reported to Trade Repositories (TRs) whereas
around 50 per cent of foreign exchange derivatives transacti