1. This paper outlines the views of IOSCO on cooperation between market authorities with regard to the monitoring of and exchange of information on large exposures on futures and options markets.

Note: The term "market authority" is used to refer to the authority in a particular jurisdiction which has statutory or regulatory powers with respect to the exercise of certain regulatory functions over a market. The relevant market authority, depending on the jurisdiction, may be a regulatory body, a self-regulatory organization and / or the market itself. The term "market" includes the clearinghouse for a market.

Large Exposures

2. A survey among WP2 members of current procedures for identifying large exposures (open positions in futures and options transactions) in individual markets (Appendix) shows that exposures are monitored in each market to identify potentially risky as well as manipulative positions. Some jurisdictions employ position limits for preventing the accumulation of large exposures, and, in addition, some jurisdictions use trigger levels for identifying such exposures.

3. A "large exposure" means hereafter an open position in futures and options on a market which is sufficiently large that it may put the market at risk if the member who holds it were to default; a large exposure will also include an open position which is sufficiently large relative to the market member's known financial resources to cause concern that the member may default when the member has substantial counterparty relationships with other derivatives market participants.

Establishment of Trigger Levels

4. It is recommended that market authorities establish qualitative and / or quantitative criteria appropriate to their markets as trigger levels for identifying large exposures.

5. Market authorities should continuously monitor the size of positions on their markets to identify whether or not they reach trigger levels. Such monitoring will be most effective where market authorities have ready access to the size and ownership of positions held by direct customers of market members. When a market authority believes that beneficial owners of positions (including positions held through omnibus accounts) could potentially pose a risk to the market, the market authorities may regard it as good practice to establish arrangements to identify those owners, when this is possible, so as to be able to assess the risk posed. When such information is not available, the market authorities should be able to exercise the power in paragraph 8. When customers are located in another jurisdiction, information may also be sought through appropriate channels from relevant authorities in that jurisdiction.

Evaluation of Exposures Reaching Trigger Levels

6. Market authorities, when they have ascertained that the trigger level has been reached, should carefully evaluate the risk of the particular market member defaulting because of the exposure and the risk to the market should the default occur. The type of information which may assist in this evaluation would include positions of the market member and its affiliates on other markets and cash and OTC transactions that augment, reduce or offset the exposure of the market member. Where the authorities of a particular market are not themselves responsible for assessing the financial resources of a particular market member, they should establish cooperative arrangements with the market or other authorities which are so responsible.

Note: If the above analysis indicates that the exposure represents an undue level of risk to the market, market authorities should take any steps they consider necessary to determine that the market member will meet its commitments, such as requiring the reduction of the exposure or the payment of increased margin.

Access to Information

7. Three possible sources for obtaining the information in paragraph 6 are:

- the market member;

- the regulatory or market authority that is responsible for monitoring the financial soundness of the market member (its "prudential supervisor"); and

- other relevant markets or their regulators.

8. If a market member does not make available information it has, including beneficial owners, to assist the market authority to evaluate an exposure, the market authority should be able to take appropriate action such as imposing limitations on future trading by the member, requiring liquidation of positions, increasing margin requirements and/or revoking trading privileges.

9. Examples of cases where other relevant markets or their regulators may be useful as information sources are:

- where the market member is unwilling to provide the information;

- where there is doubt as to the accuracy of the information provided by the market member;

- where there might be a delay with the other sources; and

- where prudential supervisors may not have the most up-to-date information.

10. Market authorities should promote mechanisms which facilitate the sharing of the above information through appropriate channels. These mechanisms could include informal arrangements to share such information or more formal information sharing arrangements, subject to appropriate confidentiality protections.

Information Sharing Arrangements

11. Mechanisms whereby large exposure and other relevant information is and could be shared on a bilateral or multilateral basis among regulators and markets would include Information Sharing Arrangements (ISAs) that may be concluded between market authorities. The following are the factors for market authorities to consider in developing ISAs, including the arrangements to ensure confidentiality and that the information is used solely for the regulatory purpose for which it was provided:

(1) Purpose of ISAs
ISAs can be useful to relevant market authorities to share pertinent surveillance and regulatory information on related derivative markets, cash markets and / or with respect to common or related participants.

In determining the markets for which such ISAs would be useful, consideration should be given to the degree of similarity and price correlations among products, extent of common participation, amount of open interest and the relative sizes of the markets as compared to each other.

If no market authority in a jurisdiction is able to obtain information domestically or to share such information with other foreign market authorities without breaching domestic law, consideration should be given to recommending appropriate amendments to the domestic law to enable such information to be obtained and shared with other market authorities.

(2) Subject Matter
An ISA should specify the types of information covered by the arrangement. It should also articulate the procedures for sharing information. Such procedures must be consistent with applicable laws and regulations.

(3) Responsible Market or Regulatory Authorities
The market authorities best situated to obtain and / or act on the information shared should, wherever possible, enter into the ISA. However, since the content and form of markets regulation vary by jurisdiction, the differences between the legal or regulatory framework of each jurisdiction must be examined to identify the market or regulatory authority who has supervisory responsibility for relevant markets and participants and / or who is able to provide or receive the information to be covered by the ISA. The arrangements should identify the counterparts to each of the market authorities in the various jurisdictions, taking into account the discussion of this issue in Section I of the 1990 IOSCO Report addressing the Difficulties Encountered while Negotiating and Implementing Memoranda of Understanding ("1990 Report").

(4) Types of Communication
An ISA should state the types of communication for the sharing of information such as (i) sharing based on the occurrence of specified trigger levels, and / or (ii) sharing subsequent to a request.

(5) Confidentiality
The arrangement should provide that a market authority that receives information will protect that information with the highest possible level of confidentiality which, at a minimum, should provide that the information should be treated with the same level of confidentiality that is given to similar information that it collects from its own market. In addition, the arrangement should provide market authorities with the opportunity to identify the level of confidentiality that they expect to be attached to information they exchange and, when required, proper enforcement arrangements should be undertaken.

Note: IOSCO notes that in some jurisdictions some of its recommendations regarding access to and sharing of information may not be fully consistent with domestic confidentiality laws. It also notes that some jurisdictions have provided expressly for confidentiality laws to accommodate regulatory access to and sharing of information.

(6) Permitted Uses
An ISA should state how information received pursuant to its terms can be used by the market authority receiving the information. At a minimum, the authority should be able to use the information received for its own supervisory purposes. When the market authority receiving the information also has a commercial function, such as an exchange, consideration should be given to ensuring that information received in the regulatory context is not used for competitive advantage.

The ISA should also address whether and under what circumstances the information received may be provided to other authorities. In the case where information sharing is between non-governmental authorities, the ISA should provide that shared information should be available to relevant governmental authorities.

(7) Limitation of Liability
Market authorities may wish to consider including in the ISA a provision addressing the limitation of liability and the right of third parties.

(8) Consultation
An ISA may provide for routine consultations by market authorities concerning the content, scope, format and procedures for communicating relevant information so as to assure its optimal use. The ISA also may contain a provision in which the authorities express their intent to consult on relevant issues as they arise.

(9) Relationship to Other Arrangements
The market authorities should include a provision in an ISA addressing the relationship of the ISA to other existing arrangements such as memoranda of understanding. It is noted that this issue is addressed extensively in Section VI of the 1990 Report.

(10) Public Policy Exception
An ISA may provide that the market authority maintains the right to refuse to provide the information in instances where the transmission of the information would violate public policy. The concept of public policy would include issues affecting sovereignty, national security, or other essential interests.