The regulation of the Australian OTC derivatives market
continues to evolve. The next step may be the introduction of a
central clearing mandate for interest rate derivatives denominated
in US dollars, pounds sterling, euros and yen.
The decision to recommend mandatory central clearing for foreign
currency-denominated derivatives, but not AUD-denominated, is based
on two factors: practicality and policy.
The practical issue is that Australian institutions already have
considerable dealings in derivatives denominated in those
currencies. As a result, they are already subject to the mandatory
central clearing requirements of those currencies' home
jurisdictions. The CFR therefore believes that the Australian
imposition of a central clearing mandate will not markedly increase
the compliance burden on Australian dealers. The same, of course,
is not true of AUD-denominated derivatives.
On the domestic front, the CFR prefers what it calls "an
incentives-led transition to central clearing", rather than
the immediate imposition of mandatory central clearing. To that
end, it will continue to monitor Australian banks' progress
towards a clearing system before recommending mandatory central
clearing. It indicates that, as a first step, any mandate would be
restricted to the inter-dealer market. Before extending that
mandate to non-dealers, the CFR would closely examine the attendant
Other "wait and see" topics addressed by the report
include platform trading (where the CFR will monitor both
overseas' developments and the results of our new mandatory
trading regime) and risk-management for non-centrally cleared
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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