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Australia reports implementation of OTC Derivatives reforms

The Reserve Bank of Australia, Australian Prudential Regulation Authority, and
Australian Securities and Investments Commission (the regulators) have released
a Report on the Australian OTC Derivatives Market.

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

The report focuses primarily 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, the regulators concluded that:

  • the Government consider a central clearing mandate for US dollar-, euro-, British pound- and yen-denominated interest rate derivatives, primarily on international consistency grounds. The initial focus of such a mandate should be dealers with significant cross-border activity in these products;
  • there is not a case for mandating North American- and European-referenced credit derivatives at this time. However, in the lead up to the regulators' next market assessment, further information will be sought about Australian market participants' counterparty exposures in these products and the breadth of central clearing of these products; and
  • they will monitor for a further period Australian banks’ progress in implementing appropriate clearing arrangements for Australian dollar-denominated interest rate derivatives, before recommending mandatory central clearing.

The regulators have not made a specific recommendation regarding a mandatory
platform trading obligation at this time.

The regulators will continue to monitor developments in market participants' risk
management practices – including collateralisation, trade compression and
portfolio reconciliation.

The report also notes that with the finalisation of ASIC's trade reporting and
trade repositories rules, Australia has introduced a broad-based mandatory
trade reporting obligation for OTC derivatives.  

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