By MICHAEL EBOH

As the Nigeria Stock Exchange, NSE, plans to introduce derivatives trading in the next couple of months, the International Organization of Securities Commissions, IOSCO, has raised concerns on the need for effective regulation of the derivatives market to ensure it does not lead to a crash in the capital market.

IOSCO, according to a statement signed by its spokesperson, Carlta Vitzthum disclosed that derivatives market intermediaries, DMI, were not properly regulated prior to 2008, a development which led to a number of them engaging in sharp practices which became obvious during the financial crisis of 2008.

To this end, she said IOSCO has published a report titled, ‘International Standards for Derivatives Market Intermediary Regulation,’ which recommends high-level international standards for the regulation of market participants that are in the business of dealing, making a market or intermediating transactions in over-the-counter (OTC) derivatives.

She said, “Historically these derivatives market intermediaries (DMIs) often have not been subjected to the same level of regulation as participants in the traditional securities market. Without sufficient regulation, some DMIs operated in a manner that created risks to the global economy that manifested during the financial crisis of 2008.”

The report, according to Vitzthum, is based on the commitment by G-20 leaders in 2009 to reform the OTC derivatives market in response to the crisis.

She said the report is taking into consideration distinctions between the OTC derivatives market and the traditional securities markets, and also the differences in jurisdictional approaches of international market authorities.

Vitzthum explained that the report draws on the extensive work IOSCO has done on traditional securities market intermediaries, in an effort to harmonise the recommendations applicable to DMIs and to avoid the creation of unnecessary burdens on entities that act as both traditional securities market intermediaries and DMIs.

She said, “The recommendations in the Report are intended to address: DMI obligations that should help mitigate systemic risks; requirements intended to manage counterparty risk in the OTC derivatives markets; and protecting participants in the OTC derivatives markets from unfair, improper or fraudulent practices.

“The recommendations are made regarding the following substantive areas: Registration/licensing standards; capital standards or other financial resources requirements for non-prudentially regulated DMIs; business conduct standards; business supervision standards; and recordkeeping standards.”

Continuing, Vitzthum noted, “Consistency among market authorities with respect to the regulation of DMIs is essential to the successful oversight of the global OTC derivatives market particularly because many DMIs operate in multiple jurisdictions.”