1. Executive Summary

This paper seeks stakeholder views on mandatory central clearing of interest rate derivatives (IRD) denominated in certain international currencies, as part of ongoing implementation of the G20 over the counter (OTC) derivatives regulation commitments.

This consultation is conducted specifically in relation to the requirements in section 901B(3) of the Corporations Act 2001 (the Act) and the Legislative Instruments Act 2003 that consultation occur prior to the Minister making a determination allowing the Australian Securities and Investments Commission (ASIC) to make rules regarding the central clearing of OTC derivatives.

The proposals set out in this consultation are based on recommendations provided by the Australian Prudential Regulatory Authority (APRA), ASIC and the Reserve Bank of Australia (Reserve Bank) — collectively ‘the regulators’ — contained in the Report on the Australian OTC Derivatives Market (the Report), published in July 2013.1 It is recommended that these proposals be read in conjunction with the Report.

In summary the proposed approach contains the following:

CENTRAL CLEARING OF G4-IRD

  • It is proposed that a determination be made in the second quarter of 2014 that will allow ASIC to make rules requiring the central clearing of US Dollar , Euro , British Pound and Yen denominated interest rate derivatives (G4 IRD).
  • The obligations would only be applied to large financial institutions with significant cross border activity in these products, referred to in this paper as G4 Dealers. An indicative list of firms that would be included in the central clearing mandate is published at Appendix A.

OTHER FEEDBACK SOUGHT

Central clearing of other derivatives

  • The Government will wait for the recommendation from future market assessments before considering central clearing mandates for any other derivatives.
  • In addition, electricity derivatives will not be considered for inclusion in the central clearing mandate until the completion of the review of the sector currently underway.2
  • The paper seeks preliminary views on the mandatory central clearing of other derivatives in order to ensure that future consultations are best targeted and the Government can provide clear direction to the market following any recommendation from the regulators.

Mandatory platform trading

  • For trading platforms no decision will be taken until subsequent reviews by the regulators.
  • In addition, the Government is reviewing the licensing arrangements for financial markets. This review will consider whether the framework is adequate to deal with derivatives trading platforms that would be suitable for mandatory trade execution.

Exemption of end-users from trade reporting obligations

  • The paper also seeks views on modification of the regulations relating to trade reporting to provide a permanent exemption to end users for trade reporting following analysis by the regulators to ensure that systemically important information is being captured.

Next steps

The Government seeks feedback on these proposals and, following assessment of stakeholder views, the approach may be modified.

Following this consultation, and subject to stakeholder feedback, the Minister will make a determination identifying classes of derivatives that would be subject to the central clearing mandate. The Minister will also expose for comment draft regulations limiting the scope of ASIC rulemaking under the framework, as appropriate.

  1. Report on the Australian OTC Derivatives Market, July 2013, available at: http://www.cfr.gov.au/publications/cfr publications/2013/report on the australian otc derivatives market july/index.html
  2. The AEMC NEM Financial Resilience Review. Further information is available here: http://www.aemc.gov.au/market reviews/open/nem financial market resilience.html