“The risk mitigation standards, along with the margin requirements, will help market participants better manage risks in transacting in non-centrally cleared OTC derivatives and improve the resilience of the non-centrally cleared OTC derivatives market,” said Lee Boon Ngiap, chair of the Iosco Working Group on Risk Mitigation Standards for Non-centrally Cleared Derivatives, and assistant managing director of the Monetary Authority of Singapore.

The standards encourage the adoption of sound risk mitigation techniques to promote legal certainty over the terms of non-centrally cleared OTC derivatives transactions, to foster effective management of counterparty credit risk and to facilitate timely resolution of disputes.

The risk mitigation standards cover the following key areas:

• Trading relationship documentation and trade confirmation
• Process and/or methodology for determining valuation
• Portfolio reconciliation
• Portfolio compression
• Dispute resolution

The global financial crisis highlighted how the inter-connectedness across financial institutions engaged in trading OTC derivatives led to contagion and heightened systemic risk. One of the key components of the G20 reform programme has been to encourage the central clearing of standardised OTC derivatives. 

However, a substantial proportion of OTC derivatives are not standardised and hence not suitable for central clearing. To reduce counterparty credit risk and limit contagion, in 2013 Iosco and the Basel Committee on Banking Supervision (BCBS) published a framework which established minimum standards on margin requirements for non-centrally cleared OTC derivatives.