Central clearing of AUD‑IRD
There is an emerging case for mandating central clearing of AUD‑IRD.
Industry take-up of central clearing had, until recently, been limited by the lack of availability of direct central clearing for domestic market participants. However two CCPs have received regulatory approval in July 2013 to offer clearing of AUD‑IRD directly to Australian participants.
A number of Australian participants have now established operational arrangements to clear transactions as direct clearing members of these CCPs. Clearing arrangements for non-dealer financial institutions and other smaller users of OTC derivatives remain relatively limited at this stage.
APRA, ASIC and the Reserve Bank will conduct a further market assessment in 2014. This will review the case for mandating central clearing of AUD‑IRD. To gauge the regulatory impact of such a mandate, the regulators will examine the extent to which domestic participants have established direct clearing arrangements with the two CCPs that have been granted regulatory approval to provide these services.
Central clearing of other derivatives
The regulators will also seek further information about Australian market participants’ counterparty exposures in North American and European referenced CDS and the breadth of central clearing of these products. In light of this information, the regulators will review the case for a domestic mandate.
Indirect effects of regulation
Some stakeholders have raised concern that, despite not being subject to direct obligations, the indirect effects of global regulation have significantly increased the costs and complexity of managing their business’s risks. These costs are expected to rise as take-up of central clearing by major participants increases.
The regulators are undertaking further work to understand derivatives use by businesses other than the G4-Dealers. This will help to inform the regulators and the Government of the indirect effects of derivatives regulation on these businesses. This analysis will also consider incremental costs and benefits of extending a central clearing mandate to some businesses other than the G4-Dealers at some stage in the future.
Understanding the indirect effects of a clearing mandate on end-users will be a very important precondition prior to any decision to mandate the central clearing of AUD‑IRD in particular.
Preliminary views sought
Some stakeholders have raised that there would be benefit to the market from the Government providing a timetable for implementation of AUD‑IRD and other derivatives. This would assist market participants and service providers to prepare for the transition to mandatory central clearing.
In order to assist the Government to provide direction as early as possible following any future recommendations from the regulator, this paper seeks preliminary views on the benefits and costs of the mandatory clearing of other derivatives as well as an indicative timetable for implementing these.
This feedback will be used in order to best tailor any future consultation.
From the point of view of your business and/or that of your customers, what is your preliminary view on the costs and benefits of mandatory central clearing of:
- AUD IRD?
- North American and European referenced CDS?
- Any other derivatives?
Do you have views on the appropriate timing of the introduction of such mandatory requirements? Are there any preconditions that should be met before such mandatory requirements are introduced?