Upcoming Mallesons seminarsParticipants in the Australian over-the-counter derivatives market and other counterparties to over-the-counter derivatives transactions in Australia.
What do you need to do?Consider the report and, in particular, the areas suggested by the Australian financial authorities for further improvements in the Australian OTC derivatives market. These may form the basis of possible developments in Australian regulation of the OTC derivatives market.
Scott Farrell
Partner
Scott Farrell
Partner
T +61 2 9296 2142
Martin James
Partner
T +61 2 9296 2198
Sydney
Martin James
Melbourne
Ian Paterson
Perth
John Naughton
Brisbane
Berkeley Cox
Hong Kong
Richard Mazzochi
(馬紹基)
Beijing
David Olsson
(沈文)
London
Rowan Russell
Today, the three Australian financial authorities (the Australian Prudential Regulation Authority, the Australian Securities and Investment Commission and the Reserve Bank of Australia) published their joint report on the Australian over-the-counter (OTC) derivatives market. The report summarises the results of the survey which the authorities conducted in respect of the OTC market as well as identifying a number of areas in which practices in the Australian OTC market might be enhanced.
In the current context of the deluge of international statements regarding the future regulation of OTC derivatives market, the paper is highly relevant and may indicate the path which any future regulatory moves to be taken by these Australian authorities is likely to take.
Here is a link to the joint press release and report.
Survey of the Australian OTC derivatives market
Those parts of the report relating to the survey results form a useful snapshot of the Australian OTC derivatives market. The report notes that the Australian OTC derivatives market is low in size both relative to the international market and, in some cases, in absolute terms. However, it also presents an important context in which the role of the Australian OTC derivatives market needs to be understood. For example, the report says:
Also, the report contains observations as to experiences in dealing with the market turbulence following the collapse of Lehman in September of last year. The report describes that the Australian OTC derivatives market “generally remained robust” during the period, although there was uncertainty amongst participants which contributed to price volatility and lower liquidity.
The report notes that to ensure resilience in the face of these types of shocks, it is important that market practices promote transparency, legal robustness of trades, management of counterparty risk and provision of information to regulators and risk management systems.
Developments which have already occurred
The report notes that there have been a number of important developments and enhancements in the Australian market in these key areas. For example:
- transparency has been promoted by the increased emphasis on vanilla products which has mitigated uncertainties around the degree of leverage and individual’s market exposures
- the legal robustness of trades has been promoted by increased acceptance over time of the importance of timely execution of industry standard legal documentation, for example, derivative master agreements such as those published by ISDA (International Swaps and Derivatives Association, Inc.)
- management of counterparty credit risks has been promoted by the trend towards collateralisation of exposures and the use of standard collateralisation documents, such as credit support annexes
- the provision of information has been promoted by the gathering momentum of automation of post trade processing.
Areas where improvement is encouraged
The report notes that there is still scope for further enhancement to the operational and risk-management practices in the Australian OTC derivatives market to ensure that they meet international best practice. In this regard, the Australian financial regulators encourage market participants to take a number of steps, working with the authorities, as appropriate:
- promotion of market transparency: by standardising contract terms, where feasible and appropriate, use of electronic platforms where available and providing data to regulators (and, where appropriate, to other participants) on trading activity, pricing and size and location of exposures. However, importantly, the report notes that:
- use and timely negotiation of industry standard documentation: Australian industry participants are encouraged to review their processes and ensure that the volume of trade conducted without completed documentation is minimised
- expand the use of collateral to manage counterparty credit risks: the use of standard collateral terms such as credit support annexes is encouraged
- promote access to central counterparties for OTC derivatives products: Australian participants are encouraged to use, where appropriate, central counterparty facilities for OTC derivatives
- expand use of automated trade processing facilities: Australian participants are encouraged to work towards industry standards for connecting to automated facilities for confirmations processing and, where available, to use trade data warehouse facilities and linked settlement services
- using portfolio compression and reconciliation tools: Australian participants are encouraged, where appropriate, to make more extensive use of multilateral portfolio compression services
- increasing the Australian influence in international industry discussion and debate: Australian participants are encouraged to be actively engaged in international industry committees to take the opportunity to ensure that the interests of the Australian market are adequately reflected in industry debate.
Where we are
The financial authorities will initiate discussions with industry participants on the topics covered in the report in the near future with a view to prioritising efforts, establishing a time-line for implementation of enhancements, and developing arrangements to monitor progress over time.
This new report is another addition to what is now a very rich landscape of regulatory developments potentially impacting the OTC derivatives market. For example, the Australian regulatory issues currently ‘at play’, which will have an impact on the OTC derivatives industry include:
- IOSCO (International Organization of Securities Commissions) Interim consultation report on unregulated markets and products. This report particularly focuses on credit default swaps and securitisation. A copy of this report can be found here.
- Proposed ‘unfair contracts’ amendments in the Trade Practices Amendments (Australian Consumer Law) Bill 2009. (The Mallesons alert on this can be found here).
- Regulation of margin lending and securities lending under the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009. (The Mallesons alert on this can be found here).
- The Australian emissions trading legislation. (The Mallesons alert on this can be found here).
These are in addition to a wave of international developments, such as the announcement of the US Treasury as to the regulation of the OTC derivatives market made last week.