Report on the Australian OTC Derivatives Market – April 2014

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 – April 2014.

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

The Regulators have reached the following conclusions 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:

• Having monitored Australian-headquartered dealers' progress in implementing appropriate clearing arrangements, the Regulators are satisfied that the incremental cost of mandatory central clearing of Australian dollar-denominated interest rate derivatives would be very low for trades between internationally active dealers in the Australian market. Consequently, they are recommending that the government consider a central clearing mandate for trades between internationally active dealers in Australian dollar-denominated interest rate derivatives.
• The Regulators do not see a case for implementing a central clearing mandate for North American, European and Japanese referenced credit index derivatives at this time, particularly since most Australian market activity in these products involves at least one EU- or US-headquartered counterparty.
• The Regulators do not believe it is appropriate to mandate central clearing for non-dealers at this time. They will nevertheless continue to monitor the availability of client clearing for OTC interest rate derivatives and the incentives-led migration to central clearing, particularly by non-dealers with access to sufficient liquidity. In addition, the Regulators will review the impact of international regulatory developments.

The Regulators have not made a specific recommendation regarding a mandatory platform trading obligation at this time. However, they note that international consistency may become a higher priority if overseas jurisdictions were to consider implementing mandatory platform trading obligations for products or asset classes widely traded in Australia.

The Regulators will also continue to monitor developments in market participants' risk management practices, particularly with respect to trade compression and collateralisation.

The report released today is the third market assessment by the Regulators in consideration of section 901B of the Corporations Act 2001. A further report is planned in 2015.