Over-The-Counter Derivatives

At the Pittsburgh summit in September 2009, the G20 leaders committed to reform over-the counter (OTC) derivatives markets, specifically that:

All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Noncentrally cleared contracts should be subject to higher capital requirements.

The G20 leaders later added to these commitments, agreeing that international standards on margining of non-centrally cleared OTC derivatives should be developed. To complement these margin requirements, in January 2015 the International Organization of Securities Commissions (IOSCO) finalised international standards on risk mitigation techniques for non-centrally cleared derivatives.

The Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) (together, the Regulators), have been working together to implement these reforms in the Australian OTC derivatives market. As these reforms cut across the responsibilities of the Regulators, which includes responsibility for advising the Minister on the case for mandatory trade reporting, central clearing or platform trading obligations, the Regulators have coordinated this process through the Council of Financial Regulators. In particular, the Regulators have carried out periodic assessments of the Australian OTC derivatives market, and produced reports based on the results.

ASIC has implemented the recommendations on mandatory trade reporting and mandatory central clearing requirements through its Derivatives Transactions Rules. The ASIC Derivative Transaction Rules (Reporting) 2013 imposes obligations on reporting entities to report information about their transactions and positions in OTC derivatives to a licensed or prescribed trade repository. The ASIC Derivative Transaction Rules (Clearing) 2015 imposes a mandatory central clearing requirement in Australia for OTC interest rate derivatives denominated in Australian dollars, US dollars, euros, British pounds and Japanese yen. The clearing mandate applies to Australian and foreign financial institutions that meet the clearing threshold.

APRA has adopted for the Australian context the IOSCO standards on margining and risk mitigation requirements for non-centrally cleared derivatives in Cross-industry Prudential Standard 226. APRA covered entities follow a phased-in compliance approach based on their portfolio size, enforcing mandatory exchange of variation margin and initial margin with their counterparties since March 2017.