Onshore central counterparties may be more practical for Asian countries in which that country’s currency is not openly traded, according to Thomas Treadwell, head of over-the-counter client clearing for Citi Asia Pacific in Hong Kong. Clearing credit default swaps through local CCPs would also likely be more feasible for these countries, since the process is linked to local bankruptcy law.
“Ultimately, the decision will be made by the local regulators according to their onshore requirements and whether they would accept the possibility of another country’s clearing solution,” Treadwell told Derivatives Week. He also said that Citi’s decision to support any local CCP would be based on client demand and regulatory initiatives within the individual countries. He declined to comment on specific countries where a local CCP might be more feasible.
Other industry officials have worried that a spate of local CCPs could create fragmented liquidity in the region (DW, 10/24), making interoperability a necessity. In terms of interoperability, Treadwell said, “There are many factors that will need to be considered for interoperability to work, for example, different operating, regulatory, and risk models from each CCP. Standardization of legal terms and the mechanics of the default management process are essential.”
The Singapore Exchange’s AsiaClear platform is the only functioning OTC clearinghouse in Asia thus far, clearing some commodity derivatives and vanilla interest rate swaps, although OTC clearing is not mandated by law. Hong Kong has announced that it will mandate central clearing for some OTC derivatives and have a CCP set up through the Hong Kong Exchanges and Clearing by the end of 2012. Other countries, including Japan, have been working to create onshore clearinghouses and have mandated the process for some derivatives. “Comprehensive connectivity to local Asian CCPs is core to our business model as regulation evolves and clearing becomes mandatory,” Treadwell said.
He added that the likely candidates for mandatory clearing in Asia would include credit default swaps, interest rate swaps and non-deliverable forwards, due to the liquidity and standardization of such products in recent years.