March 2025

Reassessing the Case for Central Clearing of Bonds and Repos in Australia

A Response to Consultation by the Council of Financial Regulators

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Executive Summary

In 2024, the Council of Financial Regulators (CFR) conducted a public consultation on the case for central clearing of bonds and repurchase agreements (repos) in Australia. The consultation sought views from respondents on a range of related issues including: (i) the costs and benefits of central clearing in these markets; (ii) market functioning and financial stability considerations; and (iii) issues related to a prospective service being provided from overseas. This paper provides the CFR's response to the public consultation.

The CFR agrees with respondent feedback that the introduction of central clearing could enhance the efficiency and stability of the Australian bond and repo markets. The CFR supports the industry exploring the introduction of central clearing in the Australian bond and repo markets where the benefits are likely to outweigh the costs. The CFR does not consider there to be a compelling case for regulatory intervention to introduce central clearing in these markets at this time.

Prospective operators will need to manage several challenges as part of the design of a bond and repo central counterparty (CCP). These include attracting a critical mass of participants and the timing of development and go-live of any service to ensure it is safe and successful. The CFR expects a bond and repo CCP to be well-supported by the industry and viable in the long term. An unsuccessful CCP is unlikely to be beneficial for market development, efficiency, financial stability or the Australian economy.

Feedback from some respondents indicated that previous statements from the CFR agencies have been interpreted as a blanket ‘domestic location requirement’ for the central clearing of bond and repos in Australia. The CFR does not have a blanket domestic location requirement for the central clearing of bond and repos in Australia. The decision to grant (or not to grant) a clearing and settlement (CS) facility licence will be determined on a case-by-case basis. This would involve consideration of all the facts and circumstances relevant to the CS facility, including its participants and the functioning of Australian bond and repo markets.

The CFR notes respondent feedback around the efficiency and resilience of the Australian bond and repo markets, which are viewed by participants as broadly efficient and resilient. Market transparency and challenges associated with settlement chains have been identified as areas where efficiency could be enhanced. The CFR's view is that there are opportunities for improvement that the industry could explore without the need for regulatory intervention. The CFR strongly encourages industry members to work together to identify and implement initiatives designed to improve transparency and settlement efficiency. Over the longer term, the CFR will monitor developments in the Australian bond and repo markets to support competitiveness, growth, efficiency, public confidence and informed participation.

1. Introduction

The Australian bond market plays a number of important roles in the Australian economy and financial system. It facilitates the issuance of government and corporate debt and is important for financial market participants' management of financial risks. The market for Australian Government Securities (AGS) also serves as a benchmark for the pricing of other financial assets. AGS and semi-government bonds (semis) are commonly used by financial market participants to meet margin and collateral requirements and qualify as high-quality liquid assets for banks’ prudential liquidity requirements.[1]

Repos are one of the most common forms of collateralised short-term financing in wholesale markets. A repo is an agreement between two parties – a securities provider and a cash provider. The securities provider sells a security to the cash provider, committing to repurchase that security at a later date at an agreed price. The difference between the sale and repurchase price reflects the interest rate paid by the securities provider to the cash provider. Repos play an important role in facilitating the flow of cash and securities around the financial system. They are one of the main instruments used by the Reserve Bank of Australia (RBA) to undertake its domestic market operations and to provide liquidity via its standing facilities. Repo transactions between market participants are typically collateralised with government securities due to their status as a high-quality liquid asset.

Currently, there is no CCP that clears transactions in the Australian bond and repo markets. This means that clearing occurs bilaterally through a complex web of transactions between participants. Recent analysis by RBA staff indicates that the potential benefits of central clearing bonds and repos in Australia have increased since the RBA's previous consultation in 2015.[2] This reflects substantial growth in the underlying markets and structural change in the composition of market participants.

In response to this analysis and renewed interest from Australian market participants, the CFR conducted a public consultation to reassess the case for central clearing of bonds and repos in Australia. The consultation sought views from respondents on a range of related issues, including: (i) the costs and benefits of central clearing in these markets; (ii) market functioning and financial stability considerations; and (iii) issues related to a prospective service being provided by an overseas operator.

This paper provides the CFR's response to the public consultation. A summary of respondent feedback is provided in Section 2. The CFR's assessment and response is provided in Section 3.

2. Feedback from Consultation

The consultation received 22 written submissions, including six confidential submissions.[3] Respondents included domestic and overseas CS facilities, market operators, Australian major banks, international banks, buy-side firms, academics and industry associations. Australian Securities and Investments Commission (ASIC), RBA and Treasury staff met with a number of respondents to discuss their submissions to the consultation.

2.1 Costs and benefits of central clearing

Most respondents agreed that the potential benefits of central clearing in the Australian bond and repo markets had increased in recent years following changes in the markets' size and structure. Some respondents noted that these benefits would be unevenly distributed across different segments of the market. In particular, the benefits were expected to be greatest for the inter-dealer segment of the repo market (which comprises of banks and other financial institutions). Some respondents also cautioned that an unsuccessful or short-lived CCP is unlikely to be beneficial for market development, efficiency, financial stability or the Australian economy.

Two respondents did not consider the potential benefits had increased sufficiently to support central clearing of the Australian bond and repo markets at this time. In particular, one of these respondents viewed the set-up and ongoing costs for industry as outweighing the benefits.

Feedback on the costs and benefits of central clearing the Australian bond and repo markets is discussed in further detail below.

2.1.1 Costs

Table 1 summarises respondent feedback on the costs associated with central clearing in the Australian bond and repo markets.

2.1.2 Benefits

Table 2 summarises respondent feedback on the benefits associated with central clearing in the Australian bond and repo markets.

2.2 CCP design and viability

2.2.1 Product scope

Most respondents viewed the central clearing of repo transactions collateralised by Australian government bonds as the minimum product offering for a prospective CCP. There were mixed views on whether a prospective CCP must also clear government bond transactions. Respondents mostly agreed that the benefits of central clearing repo transactions would be greater than bond transactions. However, some respondents raised concerns that a repo-only service may create additional frictions in moving securities between the cleared and uncleared markets, which could increase settlement delays or failures. Overall, respondents generally agreed that there are operational and netting benefits in clearing government bonds and repos at a single service.

Only one respondent suggested that all bonds, including non-government bonds, should be considered part of the minimum product offering of a prospective CCP. This respondent noted that fragmentation of the bond market based on the underlying debt instrument segment could create confusion and inconsistency for market participants. However, another respondent argued that parts of the non-government bond market, such as the asset-backed securities segment, may not be sufficiently large or have sufficient liquidity to warrant central clearing.

2.2.2 Participation and viability

Market participants generally expressed interest in exploring participation in a bond and repo CCP. Table 3 outlines some of the considerations raised by respondents that might consider participation in a prospective CCP.

2.2.3 Incentives for clearing

Respondents suggested a number of measures that could increase the take-up of a prospective bond and repo CCP in Australia (Table 4).

2.3 Efficiency and resilience of bond and repo markets

2.3.1 Safe and efficient operation

Respondents raised several considerations related to the safe and efficient operation of a bond and repo CCP in Australia (Table 5):

2.3.2 Aspects of the bond and repo markets not functioning efficiently

Overall, respondents expressed confidence in the effectiveness of the functioning of bond and repo markets. Nevertheless, there were several areas identified where the efficiency of the market could be enhanced (Table 6).

2.3.3 Potential actions to enhance efficiency and resilience

Many respondents suggested that the introduction of central clearing could enhance the efficiency and resilience of the Australian bond and repo markets. For example, broad adoption of central clearing could drive the development of initiatives such as electronic trading, process automation and increased standardisation across trading venues. A CCP could also reduce the inefficiencies posed by settlement chains and circles by netting off trades between participants, which reduces the size and volume of trades that require settlement. In addition, respondents indicated that a bond and repo CCP could facilitate more accurate data collection, which may be used for benchmark calculations and provide regulators with greater visibility of market activity. However, respondents also acknowledged that this data is also held by central securities depositories (CSDs).

Respondents suggested a number of other actions that could be undertaken to enhance efficiency and resilience of the Australian bond and repo markets, including:

  • utilisation of distributed ledger technology (DLT) to facilitate trading, settlement and custody of bonds and repos on a centralised electronic platform
  • utilisation of all-to-all trading platforms
  • development of solutions to address time zone and other issues between settlement venues in different locations, such as mandated settlement windows
  • publication of anonymised and aggregated turnover data
  • a formal consultation to evaluate the potential benefits and challenges of implementing pre- and post-trade reporting regimes for bonds and repos.

2.4 Location

2.4.1 Overseas operator providing clearing services to the Australian market

There was general agreement among respondents that bond and repo clearing could be safely provided by an overseas CCP. Preferences for an overseas or a domestic CCP varied across respondents. Many acknowledged that they would be comfortable with either an overseas or a domestic CCP if the CCP was robust, appropriately supervised and successful over the long-term.

An operator of domestic CS facilities suggested that implementing regulatory controls to mitigate risks to the Australian financial system may only be practical if a domestic location requirement is in place. It stated that a disruption at a bond and repo CCP would likely have broad market implications, including through links to other critical market infrastructure (see Section 2.3.1). Additionally, ASIC and the RBA would have greater powers to respond and support the continuity of services during a crisis at a domestic CCP.

Respondent feedback related to the location of a bond and repo CCP is summarised in Table 7.

2.4.2 Challenges and risks posed by overseas operator

Many respondents noted that a CCP with cross-border operations introduces a number of risks and challenges that must be managed carefully. This feedback is summarised in Table 8.

As noted above, respondents generally agreed that bond and repo clearing could be safely provided by an overseas CCP, provided that the additional risks and challenges were appropriately managed. Respondents suggested a number of potential mitigants, including:

  • supervision of an overseas CCP against appropriate risk management standards, such as the PFMI and the Australian regulatory framework
  • effective cross-border regulation, including cooperation arrangements with the home regulator and Australian participation in the CCP’s crisis management group
  • access to the RBA’s standing facilities
  • segregation of margin for different jurisdictions
  • industry forums to discuss challenges faced by the CCP
  • imposing additional conditions on the licensee.

3. Assessment and Response

3.1 Case for central clearing

The CFR agrees with respondents that the establishment of a CCP for Australian bond and repo markets has the potential to enhance the efficiency, stability and transparency of these markets. However, the relative costs and benefits of introducing bond and repo clearing will be dependent upon the service offering of the prospective CCP. The number of participants that use its services will also be an important factor.

The CFR agrees with respondent feedback that an unsuccessful CCP is unlikely to be beneficial for market development, efficiency, financial stability and the Australian economy.

The CFR does not consider there to be a compelling case for regulatory intervention to require central clearing in these markets at this time. Accordingly, the CFR is not considering the introduction of a clearing mandate.

It is ultimately a matter for the industry and any potential CCP entrant as to whether central clearing occurs. The CFR encourages a co-ordinated approach by the industry and prospective operators to introduce bond and repo clearing if the consensus is that the benefits outweigh the challenges and costs.

There are several challenges for the industry and prospective CCP operators to consider. For instance, a bond and repo CCP will likely require participation by many of the largest market participants to be successful.

Prospective operators will also need to carefully consider the timing for development and go-live of their services. There are significant programs of work already underway in the Australian financial system, including ASX's CHESS replacement project. The CFR agrees with respondents that the introduction of bond and repo clearing may be disruptive if it was to compete for the same resources as other industry-wide projects.

Respondents noted the importance of the Australian bond and repo markets to the Australian economy and financial system. A CCP servicing these markets would play a key role in the financial system. Any potential entrant would be subject to the licensing process and the Australian regulatory framework including supervision by ASIC and the RBA.

The CFR encourages prospective operators to engage with ASIC and the RBA during the development of a bond and repo clearing service.

3.2 Location of a prospective CCP

A CS facility may be granted an overseas CS facility licence if it meets certain criteria. These criteria include, but are not limited to, being authorised to operate in its home jurisdiction and subject to supervision that is sufficiently equivalent to the Australian regulatory regime.[7] Feedback from some respondents indicated that previous statements from the CFR agencies have been interpreted as a blanket ‘domestic location requirement’ for the central clearing of bond and repos in Australia. This interpretation implies that there would be no circumstances under which an overseas CS facility licence would be granted to a bond and repo CCP.

The CFR does not have a blanket domestic location requirement for the central clearing of bond and repos. The decision to grant (or not to grant) a CS facility licence will be determined on a case-by-case basis, having regard to all relevant facts and circumstances. This includes how the CCP will support the functioning of the Australian bond and repo markets through the provision of fair and effective services and promote financial stability.

3.3 Efficiency and resilience

Based on respondent feedback, the CFR's assessment is that Australian bond and repo markets are broadly efficient and resilient. However, the CFR acknowledges that market transparency and settlement chain issues have been identified as areas where efficiency could be enhanced.

The CFR agrees with respondent feedback that the introduction of a bond and repo CCP could improve efficiencies in these areas, but recognises that the CCP is unlikely to be a total solution. The precise efficiency benefits that might be realised would depend on the service offering and design of the CCP. For example, a CCP could mitigate the risks of settlement chains by: (i) mandating a time for settlement instruction submission; (ii) netting across settlement locations; (iii) running additional settlement batches when required; or (iv) providing a failed settlements cover service. A CCP could also provide secondary benefits to market transparency in the form of more reliable data collection. This could be used for benchmark calculation and enable greater visibility for regulators into market activity. However, a CCP would not, in isolation, provide a material uplift to broader transparency of the market. The CFR is also cognisant that having cleared and uncleared trades may introduce new inefficiencies into the market.

The CFR's view is that there are opportunities for improvement that the industry could explore without regulatory intervention. This could include the introduction of a bond and repo CCP. The CFR strongly encourages industry to work together to identify and implement initiatives designed to improve transparency and settlement efficiency. Over the longer term, the CFR will monitor developments in the Australian bond and repo markets to support competitiveness, growth, efficiency, public confidence and informed participation.


Footnotes

Australian Government Securities are issued by the Australian Government; semi-government bonds are issued by Australian state and territory governments. [1]

RBA (2015), ‘Central Clearing of Repos in Australia: A Consultation Paper’, April. [2]

The non-confidential submissions are available on the ‘CFR website’. [3]

Cheshire J and J Embry (2023), ‘Reassessing the Costs and Benefits of Centrally Clearing the Australian Bond Market’, RBA Bulletin, March. [4]

A settlement chain is a chain of securities transactions among three or more counterparties involving the purchase and sale of a single security on a single date. A settlement circle is an extension of a settlement chain where the same security is due to pass between several participants on the same day without a clear start or end point. [5]

For example, LCH SwapClear provides clearing for Australian dollar over-the-counter interest rate derivatives. For more information on SwapClear's operations in Australia, see RBA (2024), ‘Payments System Board Annual Report’, September. [6]

In relation to the degree of protection from systemic risk and the level of fairness and effectiveness. [7]