OTC derivatives reform challenges regulators from South Africa to Hong Kong
Over-the-counter (OTC) derivatives market reform outside the US and Europe will be closely monitored by companies who use these derivatives to manage foreign-currency earnings exchange-rate risk.
In recent months, the Australian Securities and Investments Commission (ASIC) has launched a consultation on proposed changes to trade reporting rules. Draft regulations for OTC derivatives have been released in South Africa. And the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) have begun a consultation on requirements relating to mandatory reporting and related record-keeping obligations.
All these moves are designed to help achieve the G20 objective of improved market transparency, but the pace of reform in jurisdictions outside those directly impacted by Dodd-Frank and the European Market Infrastructure Regulation (EMIR) remains patchy.
Daniela Peterhoff, a partner in the financial services practice of Oliver Wyman, estimates less than 10% of the efforts made by global banks on OTC reform have been allocated outside the US and Europe.
Australia is implementing the G20 agreements in stages, says Alex Chernishev, a senior associate in the banking practice of commercial law firm Clayton Utz, adding: “So far, rules in relation to the mandatory reporting of OTC derivatives have been enacted.
“The Australian reporting rules are very similar to those of Dodd-Frank and EMIR – in fact, one of ASIC’s stated aims in devising the reporting rules was to promote consistency with overseas OTC reporting regimes, so as to ensure equivalence between the respective regimes and to reduce compliance costs on reporting entities.”
|We are moving towards mandatory trade reporting,
but we are still some way from transparency requirements
around trading derivatives on platforms
Two-sided reporting has been strongly opposed by many non-dealer market participants in Australia, who believe it would substantially contribute to their compliance costs. The rules permit the delegation of reporting obligations to third parties, although the delegating organization remains responsible for the information reported.
However, ASIC has proposed an amendment to limit the extent to which such organizations can be subject to enforcement action for breach of the rules, provided that conditions are met.
The Securities and Futures (Amendment) Ordinance 2014, enacted in March, provides a broad regulatory framework for the OTC derivatives market in Hong Kong.
The new regime introduces mandatory reporting, clearing and trading obligations of OTC derivative transactions and a spokesperson for the HKMA says it is working with the SFC to develop the detailed rules for implementing the new regulatory regime.
“Countries in Asia with an OTC derivatives market – including India, China, Japan, Korea, Malaysia and Singapore – have initiated reforms, with an initial focus on mandatory reporting,” says Tom Jenkins, partner at KPMG China. “There is a feeling that in order to proceed with other aspects of reform, they need to have information on the size of the market, counterparties and exposures.”
In some cases, regulators – for example, in Hong Kong and Singapore – have introduced mandatory reporting on a phased basis, he continues, adding: “Japan is probably furthest down the line in terms of OTC derivatives market reform, having implemented mandatory reporting and some mandatory clearing since November 2012, as well as indicating that mandatory trading on electronic platforms will be introduced by September 2015.
“Another phase of mandatory clearing will happen at the end of this year to extend the obligation to more products and types of counterparties.”
The challenges are by no means limited to Asia. Natalie Labuschagne, director of financial markets and competitiveness at the National Treasury of South Africa, accepts that her country is behind other G20 nations in terms of understanding the OTC derivatives market, how it operates and the likely impact of reform.
“We are moving towards mandatory trade reporting, but we are still some way from transparency requirements around trading derivatives on platforms,” she says. “We have just issued the first round of guidelines on market infrastructure and we hope to have reporting in place by the end of next year.
“There will probably be a second round of consultation on these guidelines because of the expected volume of responses.”
As part of the reform process, Labuschagne says she has closely scrutinized the details of EMIR and the work done by the European Securities and Markets Authority (ESMA), largely because the majority of South Africa’s offshore trading is with UK or European participants.
Uncertainty around Dodd-Frank has further reinforced this trend towards Europe, with banks deciding not to face US counterparties.
“The approach taken by EMIR makes a lot of sense to us,” says Labuschagne. “It is quite pragmatic in some areas and we believe that following this template can help reduce regulatory uncertainty and help South Africa’s recognition for equivalence from ESMA.”