Report on the Australian OTC Derivatives Market – July 2013

The Reserve Bank of Australia, Australian Prudential Regulation Authority, and Australian Securities and Investments Commission (the Regulators) are today releasing a Report on the Australian OTC Derivatives Market – July 2013.

This report constitutes the latest advice from the Regulators to the Minister regarding mandatory requirements for trade reporting, central clearing and platform trading of over-the-counter (OTC) derivatives.

The report focuses primarily on the case for mandatory central clearing. Based on an assessment of current activity and practices in the Australian OTC derivatives market, and overseas developments, the Regulators have reached the following conclusions:

• It is recommended that the Government consider a central clearing mandate for US dollar-, euro-, British pound- and yen-denominated interest rate derivatives, primarily on international consistency grounds. The initial focus of such a mandate should be dealers with significant cross-border activity in these products.
• the Regulators do not see a case for mandating North American- and European-referenced credit derivatives at this time. However, in the lead up to the Regulators' next market assessment, further information will be sought about Australian market participants' counterparty exposures in these products and the breadth of central clearing of these products.
• the Regulators will monitor for a further period Australian banks’ progress in implementing appropriate clearing arrangements for Australian dollar-denominated interest rate derivatives, before recommending mandatory central clearing.

The Regulators have not made a specific recommendation regarding a mandatory platform trading obligation at this time. However, they will continue to monitor developments in other jurisdictions and seek more detailed information on activity in the Australian market.

Similarly, the Regulators will continue to monitor developments in market participants' risk management practices – including collateralisation, trade compression and portfolio reconciliation.

The report also notes that with the finalisation of ASIC's trade reporting and trade repositories rules, Australia has introduced a broad-based mandatory trade reporting obligation for OTC derivatives.

The report released today is the second market assessment report prepared by the Regulators in consideration of Section 901B of the Corporations Act 2001. The first report was released on 30 October 2012. A further report is expected in early 2014.