One of the key drivers of regulatory reform in the Australian
OTC derivatives markets will be maintaining Australian regulatory
control over the OTC derivatives markets and structures
In June 2011, the Australian Council of Financial Regulators,
comprising the RBA, ASIC and APRA, published a discussion paper,
"Central Clearing of OTC Derivatives in Australia",
in which they discussed proposals for mandating central clearing of
OTC derivatives in Australia. In that paper, the Council noted that
central clearing activities may be undertaken by central
counterparties located in foreign jurisdictions in respect of which
"Australian regulators would not be likely to have primary
More recently, the Council issued a
consultation paper on Financial Market Infrastructure
Regulation in October 2011. While the paper deals with
regulatory issues beyond the OTC derivatives market, it expressly
recognises that the issues it raises, particularly the adequacy of
regulatory oversight and powers, will be relevant to the reforms
previously proposed by the Council for the mandatory clearing of
OTC derivatives through CCPs.
So, what does the Council's paper tell us about the possible
future direction of OTC derivatives regulation in Australia? A
number of key points emerge.
While the Council believes that the risk of a CCP default is
remote, it also believes that the potential for systemic disruption
due to the failure of a CCP to be just as great as the potential
for systemic disruption that would arise as a result of a bank
failure. Accordingly, a certain minimum degree of oversight by
Australian regulators is warranted.
This should not prevent CCP facilities being provided to the
Australian OTC derivatives market by a foreign entity provided that
certain of its key operations, such as those relating to margin
requirements and default resources, are located in Australia.
Regulators should have the ability to make "listing"
or "market" rules relating to the types of derivatives
that may be subject to central clearing in Australia. This is to
ensure that certain minimum standards are maintained in the event
that a foreign controlled or domiciled CCP does not take steps to
ensure that the clearing facilities that it makes available to the
Australian market are adequate from a regulatory oversight
Regulators should also have the power to appoint a statutory
manager to a CCP providing clearing facilities to the Australian
market, where the CCP is in financial stress or not meeting minimum
operational standards, regardless of whether the CCP is located
domestically or offshore.
Accordingly, it seems that one of the key issues that will drive
the shape of regulatory reform in the Australian OTC derivatives
markets will be a desire on the part of Australian regulators to
ensure that mandatory clearing of OTC derivatives does not come at
the expense of maintaining Australian regulatory control over the
OTC derivatives markets and structures (particularly where central
clearing services are provided by foreign entities).
That said, key issues will still need to be resolved. For
example, it will be imperative to the stability of the financial
markets that the appointment of a statutory manager to a CCP, and
the exercise of any powers conferred on it (including to cancel
and/or suspend transactions) do not disturb the existing legal
framework in Australia that supports the enforceability of OTC
derivatives. In addition, in light of the Council's view that
it is desirable to impose "location" requirements on CCPs
that are systemically important to Australia, where the CCP is
located offshore there will be scope for the Australian
"location" requirements to be in direct conflict with
other foreign regulations that may apply to the offshore CCP.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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While the use of cash settled equity swaps is an established part of the Australian securities market, their use in recent high profile takeovers in Australia has attracted much attention. In particular, this attention has focused on the use of swaps by bidders or potential bidders in target companies without disclosure.
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