06 Mar 2014

Mandatory central clearing of G4 IRDs in 2015?

by Louise McCoach

Stakeholder feedback on the "Proposals Paper: G4-IRD central clearing mandate" must be in by 10 April 2014.

It now appears likely that mandatory central clearing of G4-denominated interest rate derivatives (IRD) will kick off next year.

The Government announced last week that it wants to give the Australian Securities and Investments Commission (ASIC) the necessary authorisation in the second quarter of this year, and released a consultation paper seeking stakeholder views by 10 April 2014.

This is the latest step in the Government's overall implementation of the G20 derivatives reform program.

Who, what, when?

Subject to any feedback on the proposals, the Government wants ASIC initially to mandate central clearing for a limited range of products and participants.

The products are IRD denominated in $US, GBP, Euro and Yen.

The participants (referred to as G4 dealers) will be large financial institutions with significant cross-border activity in these products. The precise rules for determining who's inside the tent have yet to be worked out, but the Government has issued an "indicative list" in the proposal paper issued on 27 February: ANZ, Bank of America, CBA, Citibank, Deutsche Bank, JP Morgan Chase Bank – London, Lloyds, Macquarie, NAB, RBS and Westpac.

Intragroup trades will be exempt.

Once ASIC is authorised to make the necessary rules, it will begin a consultation process on the content of those rules. The final rules will then require sign-off by the Government.

The Government hopes that this process will be completed by early 2015, which, it believes, will give G4 dealers plenty of time to prepare for the new rules.

Processes for mandatory clearing

The mandatory clearing will need to be carried out through central counterparties (CCPs) that are either licensed by ASIC or prescribed by the Government.

ASIC licensing will be required for CCPs that are judged to be operating in Australia. However, recognising the large cross-border element in derivatives trading, the Government is willing to prescribe overseas CCPs that are used by Australian institutions.

End-user exemption

The Government proposes to make the current temporary trade reporting exemption for end-users permanent. The exemption runs out at the end of this year, but the Government thinks that making it permanent will give certainty to stakeholders and "focus trade-reporting implementation on the major market participants in Australia". The permanent exemption may be narrower than the current one, largely to ensure that regulators can access relevant information on systemically important derivatives trading.

Other products and issues

The Government is still in the early consultation stages regarding mandatory central clearing of other derivatives, such as AUD-IRDs and North American and European-referenced credit derivatives.

In general terms, it will wait for recommendations from future market assessments before considering a clearing mandate for other derivatives. In particular, electricity derivatives will not be considered for inclusion in a clearing mandate until the completion of a review of the electricity sector that is currently underway.

Despite this, the Government has started to sound out participants. The proposal paper asks for preliminary views on the costs and benefits of mandatory central clearing of derivatives generally.

The appropriateness of trading platforms for mandatory derivatives trading is also still up for discussion.

Have your say

The proposals paper is open for public comment until Thursday 10 April 2014. 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.