IOSCO Reports Challenges in Applying Commodity Market Principles to OTC Markets

In new survey results on the implementation of certain IOSCO Principles to address commodity derivatives market volatility, regulators and exchanges reported challenges when applying IOSCO principles to the OTC markets. (See prior coverage.) 

IOSCO highlighted the following feedback received in surveys from 14 regulators and 19 exchanges:

• OTC Transparency, Principle 9. Most regulators have access to the reporting of OTC commodity derivatives to trade repositories, but the information reported to trade repositories is not available for exchanges to monitor their markets. IOSCO urged members to work with international derivatives data committees "to review standardized data elements as they relate to commodity derivatives to ensure that parties to the transaction can report data accurately for the unique characteristics of different commodities and increasingly complex contract structures."
• Authority to Obtain Information, Principle 12. While some exchanges effectively identify risks in exchange-traded derivatives, many lack authority to access OTC position data. Where data is available, it often comes from member submissions ("using their rulebook, regulatory framework or both"), but these sources are limited, hindering exchanges' ability to address "spill over risks" from related markets. Survey respondents said that OTC position data is typically ad hoc or post-event and differs from data reported to trade repositories, further complicated by anonymity, cross-border issues and gaps in regulatory coverage, especially for physically settled commodity forwards. IOSCO recommended that its members "ensure that both exchanges and regulators can respectively access and consolidate relevant on-exchange and OTC data."
• Large Positions, Principle 14. Most exchanges can identify large positions and track those under common ownership, with some able to aggregate customer positions across affiliated exchanges. However, most exchanges' position tracking is limited to exchange-traded positions, excluding OTC. While most regulators have access to large position reports, this access is often ad hoc. IOSCO recommended that relevant jurisdictions explore possible solutions to address the limitations in aggregating OTC positions with exchange positions due to derivatives almost always not being identical or equivalent to those traded on exchange markets. In addition, IOSCO proposed "to develop a project to work with exchanges to determine feasible ways that
  they could receive OTC trade reports from their members, for purposes of aggregation with the exchange-traded positions of these members."
• Intervention Powers in the Market, Principle 15; Unexpected Disruptions in the Market, Principle 16. Most regulators indicated that they have "varying degrees of authority to intervene in [exceptional] market circumstances," though it is unclear if this extends to OTC markets. Most exchanges reported having effective measures to address disorderly commodity derivatives markets, but some highlighted challenges in intervening in OTC markets. IOSCO recommended that members (i) balance risk management and price discovery when applying market control measures, and (ii) enhance the mechanisms in place for open communication (both between exchanges and regulators, and among regulators) during times of crises.

IOSCO said it anticipates additional work related to these issues.