Asia prepares for central clearing of OTC derivatives
14 October 2011
OTC derivatives trading activity is going to shift to central clearing in the next few years in Asia, like the other leading global capital markets. CCIL in India has provided central clearing for OTC derivatives for some time, SGX in Singapore has started it for interest rate derivatives recently and JSCC in Japan began CDS clearing in July. Hong Kong, Korea and Australia are also expected to make headway in this regard soon. But these changes are going to impact the buy side participants more than sell side in some ways as the buy side has had little experience of or connectivity to central counterparties (CCPs). Buy side participants are going to require new connectivity and transactions are going to become more complex, with collateral and margining management becoming more rigorous. Market participants can expect their costs to go up as well. For example, in the Hong Kong market, HKEx is going to levy service charges on market participants who utilize its CCP services. In many markets, it will be a tough task to manage the tight time-lines the regulations are putting in place for these CCPs. Scalability, especially of the central counterparty clearing (CCP) organizations, might be also an issue as they have dealt with much lower volumes than are expected once the new rules take effect. Another problem with the Asian market is that it is relatively immature and fragmented. The lack of regulatory cooperation and different regulations across different jurisdictions might prove to be detrimental to the healthy growth of central clearing in the region. But there are important positives to be taken from this discussion. The new environment is expected to create more transparency, better pricing, and lower systemic risk. This will lead to greater confidence among participants. Competition among CCPs is expected to result in innovative margin netting and pooling models that will provide more choices and greater efficiency for OTC derivatives trading. It is certainly going to be a very important transition to make for the leading global capital markets. I am going to be speaking on these and related issues at an upcoming event, OTC Derivatives Asia 2011 in Hong Kong on 18th October.