IN BRIEF - Australian derivatives industry makes some runs

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Scott Farrell
Partner

Scott Farrell

Partner
T +61 2 9296 2142

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IN BRIEF - Australian derivatives industry makes some runs

“It is easy to get lost in the detail of the changes, particularly if you are not involved in the credit derivatives market. But an understanding of the detail is not needed to appreciate the relevance of the change.”

The recent standardisation of coupon terms for Australian credit derivative contracts has broader implications than simply on the pricing of credit derivatives. It represents a clear and real initial response by the derivatives market to the “encouragement” offered by Australia’s regulators for reforms in the industry.

It is easy to get lost in the detail of the changes, particularly if you are not involved in the credit derivatives market. But an understanding of the detail is not needed to appreciate the relevance of the change. All that is needed is a bit of recent history.

In May of this year, the three Australian financial regulators released a survey on the Australian OTC derivatives industry (read the Mallesons alert on this survey here). A key part of the report was a list of areas where the market was “encouraged” to improve. This included two important matters:

Promoting access to central counterparties for OTC derivatives products.
At a practical level, the use of central counterparties requires an enhanced level of standardisation because central counterparties cannot clear non-standard trades. Together with industry adherence to ISDA’s the “small bang” protocol in July, these changes to coupon terms provides standardisation and satisfies an important prerequisite for central clearing of Australian credit derivatives.

Increasing the Australian influence in international industry discussion and debate.
The standardisation of coupon terms was only possible by a joint effort of the Australian Financial Markets Association and the International Swaps and Derivatives Association. Together, these two associations established the Australian CDS Standardisation Working Groups for this purpose. The result of this joint effort is not merely to an Australian market convention, but the adoption of the standardised coupons world-wide for transactions on Australian reference entities. This should be seen as a significant step in the right direction towards the regulators’ goal.

In an article in the first edition of Regulator (which can be found here ), we said in relation to the collaborative approach to reform offered by the Australian financial regulators: “To use a sporting analogy, Australian financial regulators have stepped up to the crease. Now the Australian market must step up too, and play with them.”

The standardisation of coupon terms show that the Australian credit derivatives industry has not only stepped up to play, but now has some runs on the board.

This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.

Article

“It is easy to get lost in the detail of the changes, particularly if you are not involved in the credit derivatives market. But an understanding of the detail is not needed to appreciate the relevance of the change.”