ISDA have highlighted the sentence in the G20 commitments that makes less sense than some, namely “All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest.”
For anyone involved in the OTC market for the past 10 years we’ve seen huge progress in building out new infrastructure such as the DTCC Trade Information Warehouse, the MarkitSERV combined confirmation platform, SwapClear, ICE and not least FpML has been through many versions of development.
FpML is the best representation of OTC products we have, and there is a certain amount of interoperability with FIX, enabling firms in other markets to communicate FpML within FIX where needed. And that brings me to the word “standardised”, and as ISDA points out, no-one has actually defined what the term means, or has a plan to do so.
You could argue that FpML has enough scope and usage that it self defines what a standard contract is – anything outside FpML has to be pretty unusual by now. ISDA also suggests liquidity could be part of the definition, but what’s really missing is any output from any G20 group on a process to create a definition of what “standardised” means, and especially in respect of cleared products.
At the moment the de facto definition of “standard” is derived from the product coverage at SwapClear, ICE, CME, Eurex and SGX. If it’s not being cleared, it’s probably not “standard”, but yet Swaptions, Caps and Floors are common and regularly traded, but not yet cleared.
As I think everyone knows – the CCPs have their own approach to evaluating whether a product can be cleared – not least whether it is liquid, and can be traded in a default situation. My guess is that “standardised” will come to be synonymous with “cleared”, as the two seem to fit the same conceptual space – in which case the CFTC, SEC and ESMA will need to recognise they can’t mandate clearing for a ‘standard’ product, unless a CCP is willing to accept it in the first place.
And the interesting competitive aspect for CCPs, is that if one CCP can provide support for a product like an interest rate option, does that mean all the CCPs in the Rates space must do too, as that will then extend the scope of what’s “standard” in the eyes of the regulators?
Full ISDA commentary here.