THE South African authorities have made some progress in developing a system of regulation for over-the-counter derivatives (OTC), but many details of the reforms remain unresolved.

This is according to a report by an international body which promotes financial stability globally.

The first steps towards regulating of the OTC derivatives market in South Africa were taken with the adoption by Parliament of the Financial Markets Act, but final regulations are still required for it to be implemented.

The Financial Stability Board’s seventh peer review report on South Africa released by the Treasury this week noted that current drafts of the regulations would require providers of OTC derivatives to report all their OTC transactions, though this would not apply to corporate end users.

"The authorities expect this reporting obligation to be effective by the end of June 2013, although the obligation may be implemented across contract types in a phased manner," the board said.

South Africa as a signatory to the Group of 20 is obliged to implement its commitments on the trading, clearing and reporting of the contracts.

Preliminary estimates of the size of the domestic OTC derivatives market suggested as at end-June last year, it had a notional value of R27.7-trillion. About R24-trillion (85%) was in interest rate contracts, while about R3.3-trillion was in foreign exchange-related contracts. Smaller amounts were reported in equities (R41.5bn), credit (R23bn) and commodities (R18.8bn).

Interbank interest rate transactions constituted 59% of the outstanding OTC derivatives market (about R16-trillion); of these transactions, 61% involved a South African bank and a foreign bank as counterparties.

The board said the authorities were concerned about the cross-border effect the proposed reforms would have on other jurisdictions. They were also not proceeding with regulating trading as they did not see this as an immediate priority.

Commenting on the board’s recommendation that the National Credit Regulator be absorbed by the Financial Services Board when the twin peaks model of financial regulation is implemented, Treasury deputy director-general Ismail Momoniat said its views would be taken into account when the system is finalised.

The Treasury will engage with the Department of Trade and Industry, under which the National Credit Regulator currently falls, on the best way forward.

The Treasury was aware that a multiplicity of supervisors widened the scope for regulatory arbitrage.