A new survey from the International Swaps and Derivatives Association (ISDA) examines the development of capital and derivatives markets in emerging market and developing economies (EMDEs).
The survey looks at these markets across 44 EMDEs, which include Ghana, Mexico, Pakistan, Serbia, Vietnam and United Arab Emirates. It also recommends potential policy approaches for authorities in those jurisdictions.
Among the findings, it said that 19 out of 44 surveyed EMDEs have restrictions in place limiting the types of participants allowed to use derivatives, while 18 of 43 EMDEs limit or prohibit use of certain types of derivatives. Further, 20 out of 43 jurisdictions require firms to register before they can engage in derivatives activity.
“To help the development of local derivatives markets, policymakers should address certain regulatory, legal and risk issues governing their use. But while some practices, laws and rules, such as the enforceability of close-out netting, are essential in every jurisdiction, not all global regulatory standards are appropriate in all EMDEs. Our survey is intended to shed light on the state of play in 44 emerging market and developing economies, and to recommend steps authorities can take to foster safe and efficient derivatives markets,” Scott O’Malia, ISDA’s chief executive, said.
It also looked at some of the regulatory reforms that the EMDEs have already implemented. Specifically, 17 out of the 44 jurisdictions have reporting requirements for over-the-counter derivatives transactions in place, while nine out of 44 have introduced margining requirements for non-cleared derivatives. In addition, six out of 44 have rolled out clearing mandates for certain standardized derivatives.
The ISDA report also included recommendations. Among them, they said legislators need to identify in detail the relevant areas of local law that could potentially conflict with the effectiveness of netting agreements, so all relevant issues are adequately addressed in local legislation. Netting legislation should deal with close-out netting as well as with financial collateral.
Also, they point out that registration requirements could have the unintended consequence of reducing liquidity and stability by causing already-regulated derivatives dealers and advisors to withdraw from or limit their exposure to the market. To avoid this, policymakers should consider aligning their approach with jurisdictions of comparable size and with similar counterparty types.
In addition, policymakers should allow diverse types of counterparties with different business models and risk exposures to participate in derivatives markets, including foreign counterparties. A wider range of participants will help financial market development and also allow a smoother reallocation of risk in the system between institutions. Also, when contemplating the implementation of margin rules in EMDEs, regulators should consider the scope of the rules. Specifically, entities that are not systemically important should be exempt from margin requirements.
Finally, regulators in emerging and developing markets should ensure that market participants have appropriate risk management policies and practices in place. This involves developing, implementing and periodically benchmarking risk management policies and practices.