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.
That is the only firm recommendation in the Council of Financial Regulators' latest report on the derivatives market. Other possible changes, such as mandatory central clearing of AUD-denominated interest rate derivatives and mandatory platform trading, are slated for further investigation before the CFR decides on a policy recommendation.
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 costs.
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 trades.
You might also be interested in...
- Mandatory OTC derivatives reporting now a reality
- Australian OTC derivatives reforms passed - with some changes to meet electricity market concerns
- ADIs welcome transitional relief to Basel III counterparty credit risk measures implementation
- Regulators support industry-led move to OTC central clearing for now, and broad mandatory reporting
- Derivatives Developments - A New World Order
- Government introduces derivatives reform Bill into Parliament
- One month left to shape APRA's implementation of Basel III OTC derivatives capital requirements
- FIA-ISDA Addendum for cleared derivatives transactions released
- ISDA publishes Tri-Party IA Notices
- ISDA Dodd-Frank Protocol opens for adherence
- ISDA Eurozone Contingency Planning - New Illegality/Force Majeure Protocol
- ASIC looks at relaxing financial requirements for issuers of electricity derivatives
- English Court upholds ISDA's interpretation of ISDA Master Agreement
- Government consults on new OTC derivatives framework for Australia
- CAMAC releases report on derivatives regulation
- ISDA publishes draft Appendix to the 2011 ISDA Equity Derivatives Definitions
- Documentation developments: Section 2(a)(iii) of the ISDA Master Agreement
- Where to now for OTC derivatives - lessons from ISDA's AGM
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. Persons listed may not be admitted in all states and territories.
