Australian Regulators' Statement on Assessing the Case for Mandatory Clearing Obligations

Three members of the Council of Financial Regulators, the Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC), have today published information about how they will assess the case for a clearing mandate under the new regulatory framework for OTC derivatives markets. The regulatory framework provides for regulators to advise the Minister in relation to a clearing mandate, which would require clearing of specified classes of OTC derivatives subject to ASIC rules.

To date, the regulators have favoured an approach whereby central clearing arrangements are given time to evolve in response to economic and regulatory incentives and the commercial considerations of market participants and clearing providers. Internationally, however, there is increasing interest − including from the Financial Stability Board − in understanding how those jurisdictions that have not yet adopted mandatory requirements would decide whether and when to do so.

The information issued by the regulators today addresses the following:

• Preconditions for central clearing. Recognising that not all products will be suitable for central clearing, the statement identifies some preconditions, including around liquidity, standardisation and valuation methodology.
• The potential benefits of central clearing for the efficiency, integrity and stability of financial markets. The benefits of central clearing are likely to be greatest for products that are traded widely in the Australian market, particularly those which give rise to sizeable counterparty credit exposures between large financial institutions when not centrally cleared.
• The incremental benefits and costs of a mandated rather than incentives-led transition to central clearing. An important consideration will be the availability of central clearing options that meet the needs of Australian market participants. Any incremental costs of imposing a mandate are likely to be lower where there is a choice of clearing solutions, allowing participants to select the clearing arrangements that best fit the scale and scope of their business. These may be either domestic or international.
• The benefits of international consistency. Broadly harmonised requirements would limit the scope for regulatory arbitrage. Mandating the central clearing of products that have been mandated in other jurisdictions would also increase the likelihood that the Australian regime was considered equivalent to relevant overseas regimes and therefore that Australian-based participants would not be disadvantaged in their international activities.

This approach will be applied in the regulators' ongoing OTC derivatives work, and in particular in the next report on the Australian OTC derivatives market, scheduled for release in mid 2013. The particular focus of this report will be the case for imposing a central clearing mandate in Australia.