The Reserve Bank of Australia, in connection with Australia’s Council of Financial Regulators, has released a discussion paper on “Central Clearing of OTC Derivatives in Australia.” As the title suggests, the paper analyzes the over-the-counter derivatives market in Australia, and considers the positive and negative consequences of derivatives reform, and especially of central clearing. This paper is partially a response to the implementation of derivatives and clearing reform movement well underway in the United States and Europe, and partially as part of Australia’s G-20 member responsibilities.
In 2009, G-20 member nations pledged to reform the OTC derivatives market based on a four-point plan: central clearing, electronic trading, expanded record-keeping, and higher capital requirements. The deadline was set for 2012. The United States, Europe, and other large derivatives markets are already in the thick of legislation and regulation. Australia, with only a small derivatives market, is moving slowly. However, as extraterritorial requirements creep into Dodd-Frank proposals, Australia is feeling the pressure to regulate its home turf.
According to the Reserve Bank, “products most actively traded by domestic market participants are interest rate and foreign exchange derivatives, and that it is likely that there would be some scope for central clearing of at least some of this activity.” However, the risks of creating central counterparties, or CCPs, weighs heavily on the minds of Australian regulators. Though CCPs could cut down on bank interdependence and allow for central management in case of a crisis, but it also opens the door for system-wide failure caused by a single entity.
However, without domestic CCPs, many OTC trades could be at the mercy of foreign clearinghouses. Therefore, “the Council agencies are considering the case for a requirement that activity in Australian dollar-denominated interest rate derivatives be centrally cleared and whether this should take place domestically. A mandatory clearing requirement to that effect would generally apply to financial institutions acting in the domestic market (such as Authorised Deposit-taking Institutions and Australian Financial Services Licensees); the Council agencies would expect that some market participants would be exempt from this mandatory requirement, depending on their size or class.”
The Reserve Bank of Australia and Council of Financial Regulators are seeking feedback, either by mail or at OTCDConsultation@rba.gov.au by August 5, 2011. Unless otherwise requested, all submissions will be posted on the institution’s website.