Australian regulators unveil criteria for mandatory clearing

Australian over-the-counter derivatives may be forced to clear through central counterparties under certain specific conditions, according to an announcement from three regulatory bodies.

The Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (Apra) and the Australian Securities and Investments Commission (Asic) yesterday released a joint statement outlining the process by which they will decide whether and when a particular product must be cleared through a central counterparty.

The regulators have, in the past, favoured an approach "whereby central clearing arrangements are given time to evolve in response to economic incentives" over one of the mandatory requirements.

The Financial Stability Board (FSB) has instructed jurisdictions that initially want to avoid imposing mandatory requirements to "clearly articulate a timetable, criteria and thresholds" for deciding in which cases they would be adopted.

In response, the three Australian regulators have published guidelines on which OTC derivatives they will assess and the judging criteria they will use to determine the suitability of such requirements.

They will take into account both the implications of mandatory clearing of any given product for the Australian financial system, and for the international consistency of OTC regulation.

Domestically, the regulators say, this requires considering the extent to which market participants are already centrally clearing the product, and the ability of market participants to access that clearing. They will also look at whether there is any "commercial pressure or regulatory incentives" for the product to be centrally cleared.

The regulators warned that issuing a mandate for a particular product would "constrain Australian participants' choices" if there was not an adequate supply of licensed central counterparties to clear it.

"In particular, participants would be unable to select clearing arrangements that best fit the scale and scope of their business, operationally and financially, with potential adverse effects for market functioning," they said. "In such circumstances, the incremental regulatory cost of imposing a mandate could be relatively high."

However, as the transition towards clearing progresses, the diversity of available central counterparties should increase, and the incremental costs could "substantially" decrease; shifting the regulatory landscape.

On a global level, the "absence of broadly harmonised requirements" could create the potential for regulatory arbitrage, the regulators note. "Relying on incentives while other jurisdictions adopt central clearing mandates could create reputational risks for Australia," they said.

"The scope of products considered in this regard could therefore extend beyond those prioritised purely on the basis of product characteristics and activity, to capture other products for which a mandate has been introduced in other jurisdictions and for which there is material activity in the Australian OTC derivatives market."