4.2 Central Clearing

In its earlier consultation the Australian Government sought stakeholder views on the option that systemically important derivative classes be identified as priorities for mandating (such as Australian dollar (AUD) denominated interest rate swaps (IRS).  This option would be subject to further assessment of the market and monitoring of the impact of capital incentives and other initiatives to ensure that central clearing becomes standard industry practice in Australia within a timeframe that is consistent with international implementation of the G-20 commitments.

This option was generally supported by stakeholders.

The Report subsequently recommended that a mandatory clearing obligation is not necessary for any derivative at this time, but may become necessary in the future.

The Report recommended that at this stage it remains appropriate for industry-led migration to central clearing of AUD denominated IRS to continue for the time being.  There is clear evidence that large Australian banks are establishing central clearing arrangements for this product class.

Industry migration to central clearing is likely to accelerate once a licensed central counterparty that clears these products is available in Australia, particularly given emerging economic incentives including higher capital charges for non-centrally cleared trades.

The Report also found that there are good prospects for adequate arrangements to be put in place for Australian participation in the relevant CCPs.  However, should the migration of single-currency interest rate derivatives to central clearing not make sufficient progress in the near future, the regulators would consider recommending that a mandatory central clearing obligation be instituted as a priority.

The regulators and Government will also regularly consider Australia’s position in relation to decisions to mandate derivatives for clearing in other jurisdictions.  This analysis would consider whether there would be benefits to the Australian economy and/or the efficiency, integrity and stability of the Australian financial system from eliminating potential regulatory gaps by also mandating those derivatives in Australia.

Australian regulators will also provide urgent recommendation in between assessments, if required, in response to unexpected market developments in Australia or overseas.