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Asian regulators urge CFTC to act on swaps clearing

Group fears systemic risks; Follows in footsteps of Japan

Five powerful Asian regulators have clubbed together to openly express their concern to authorities in the US over aspects of Dodd-Frank rules that they say could pose systemic risks if forced on non-US institutions.

The Asian authorities are worried that some aspects of the proposed rules will mean non-US institutions will have to comply with US rules to transact with the US, particularly in the swaps and derivatives markets.

In an open letter sent to Gary Gensler, chairman of the Commodity Futures Trading Commission, the Monetary Authority of Singapore, Hong Kong Securities and Futures Commission, Hong Kong Monetary Authority, the Australian Securities and Investments Commission and the Reserve Bank of Australia say requirements might have substantial effects on institutions outside the US, "including increasing market fragmentation and potentially systemic risk in these markets, as well as unduly increasing the compliance burden on industry and regulators."

The letter follows one sent earlier last month by the Financial Services Agency in Japan, which encouraged the CFTC to reconsider the "necessity of extraterritorial application of US derivative regulations".

The Japanese authorities also say implementing new rules on cross-border transactions would necessarily be done inconsistently, given that many countries are at wildly differing stages of maturity and progression in terms of implementing the G20 requirements.

These requirements are part of efforts, launched in the wake of the financial crisis, to make the derivatives markets more transparent and ensure all eligible derivatives transactions are cleared through clearing houses or some other form of central counterparty.

The fear is that, without proper coordination, additional costs will be imposed on derivatives transactions, so reducing liquidity in the markets and putting an unintentional but damaging squeeze on the potential profitability of banks active in the derivatives markets.

Since no single central counterparty is available for both parties conducting a cross-border trade, "market participants will not be able to enter into a transaction for fear of finding themselves in breach of either of the two sets of regulations", the Japanese regulator said.

As a result, Japan asked the CFTC to defer the application of its regulations on cross-border transactions until an internationally consistent standard had been developed for cross-border OTC derivatives. This should be for a period of "at least one year and renewable, if necessary".

The powerful Asian lobby is likely to prove troublesome for US regulators, who have proposed delaying the introduction of the rules, for a second time, until the end of this year.

Gensler has stated publicly that US bodies are working with their overseas counterparts to make sure the G20 reforms are implemented in a harmonized way.

The Asian regulators pointed to the risks that local and regional clearing houses might not be able to obtain US regulatory approval in time to clear products mandated by the CFTC, meaning that all such deals would have to be processed by a handful of global clearing organizations.

This could result in pressure on regional players and potentially lead to over-concentration of risks in a small number of larger clearing houses.

"Potential market disruption or fragmentation, with consequently increased risks to systemic stability and market liquidity in our markets, might arise as market participants might have to change their business models or even withdraw from certain businesses, all within a relatively short period of time," states the letter from the group of Asian regulators.

The letter also requested that the CFTC keep in mind particular local characteristics that could affect the decision to trade derivatives on electronic platforms or centrally clear them.

"For example, in the case of Hong Kong, Australia and Singapore, we are studying whether local market liquidity can justify implementation of mandatory trading of OTC derivatives products on exchanges or electronic trading platforms," they state.

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