Is Australia sticking to type by allowing a market-driven solution to mandatory clearing of over-the-counter derivatives? Or are the findings found in the latest OTC Derivatives Market Reform Considerations report from the Council of Australian Financial Regulators one of the smartest responses from a small-to-mid-sized G20 country yet?
Depending on who you talk to, the Aussie authorities are either “kicking-the-can-down-the-road”—evoking the stereotypical, “She’ll be right” mentality—or finding a solution to a problem that is currently vexing even the bigger G20 countries, not to mention the smaller ones. The solution may be attractive for smaller jurisdictions with smaller OTC derivative markets.
The council released its findings late Wednesday, which immediately had the market and law community buzzing (DI, 4/20). Until last week, the market had been expecting a more heavy-handed regulatory response from the traditionally left-leaning federal Labor government.
The report notes that if the market wants a domestic CCP, then they can build it themselves. To that end, ASIC will be given the tools to force offshore CCPs to incorporate domestically the part of the business that clears Australian dollar derivatives. The regulator will also have the power to enforce mandatory clearing at will.
According to lawyers, not only have the Aussies fulfilled their G20 commitments, but they’ve also done it without actually doing anything! One Sydney-based lawyer said the government had realized that changes in international rules, such as Basel III for example, will already force international dealers to clear most OTC derivatives if they want capital adequacy breaks. Extraterritoriality of European and U.S. regulation is also doing most of the legal grunt work to make sure dealers and clearinghouses fall into line with trade data reporting. With most of the bigger economies stalling on CCP development—and even the efficient, gung-ho Asian economies of Singapore, Hong Kong and Japan taking the foot off the gas recently—Australia’s approach could be one emulated by other G20 countries, the lawyer said. “The banks like being left alone and the politicians like not having to make solid decisions. It’s a win, win situation,” the lawyer said.
Back Down Under, however, there’s one industry participant that may not be cheering the council’s advice. The Australian Stock Exchange had been keen to get a slice of the CCP pie since Pittsburgh’s 2009 G20 meeting, according to market officials. But, now that they have to compete against the likes of the established international clearinghouses, they may not be so keen to establish a domestic solution. The ASX, however, will fight on to the last, according to Matthew Gibbs, spokesman at the national bourse in Sydney. “Far from ‘sinking’ any plans, the council has advised that no restrictions should be placed on local participants in accessing domestic or offshore financial infrastructure,” Gibbs told DI. “ASX has considerable expertise in providing risk management and derivatives clearing services. We will continue to examine the commercial opportunities of offering an OTC derivatives clearing solution.”
Whatever your thoughts on the Aussie approach to mandatory clearing, you have to admit that this solution sure beats building a clearinghouse from scratch. A point that probably won’t be lost on other G20 partners. Lawyers, at least, are convinced the Australians have certainly given the G20 something to contemplate.