Published by the Australian Financial Markets Association in the Policy and Markets Brief, July 2015.

Over-the-counter (OTC) derivatives played a central role in the global financial crisis – a fact that is sometimes forgotten nearly seven years after the event. Some OTC derivative markets froze, counterparties cut each other off, and a global recession began. In September 2009, G20 leaders committed to a range of reforms intended to increase transparency, reduce systemic risk and support the prevention and detection of market abuse in OTC markets. The Bank for International Settlements has estimated that the net benefit of the G20 OTC derivative reforms is hundreds of billions of dollars per year globally, and billions of dollars per year to the Australian economy. ASIC has been heavily involved in the implementation of OTC reforms in Australia.

The requirement to report OTC data to trade repositories has been introduced across a majority of G20 countries. Unlike some jurisdictions, in Australia the trade reporting regime is being implemented in phases. This decision was taken in an effort to manage the impact of these changes on the Australian market. The first phase of reporting targeted the largest banks and commenced on 1 October 2013. The final phase is due to be implemented on 12 October 2015. This phase will require all remaining reporting entities (including the remaining authorised-deposit taking institutions and Australian financial services licensees) to report any remaining OTC derivative transactions.

The Australian Government has consulted on a draft regulation that would provide relief from trade reporting requirements for some reporting entities. The proposed relief would allow ‘single-sided reporting’ for entities with low levels of OTC derivatives transactions, provided they conclude their derivatives transactions with counterparties that are already required to report the trade.

ASIC has already started to obtain insights from its analysis of OTC data. Internal OTC derivatives reports currently compiled by ASIC include:

• trends analysis measuring levels of leverage, collateral and counterparty validation of positions
• analysis of aggregate exposures across different OTC markets, and
• counterparty concentration.

In addition, ASIC has taken steps to upgrade its Market Analysis & Intelligence (MAI) surveillance system to establish a baseline for the use and analysis of OTC derivatives trading information. This will enable ASIC to conduct surveillance activities of entities using exchanged traded and OTC derivatives, as well as to more systematically identify trends and anomalous behaviour in OTC derivative markets.

These future enhancements offer the potential for an automated linking of OTC derivatives data with current equity and futures exchange market data for integration of cross market surveillance within MAI. Once implemented, this will put ASIC at the forefront of global markets regulators in bringing these data sets together for market surveillance.

There has also been substantial progress in implementing a requirement to centrally clear trades through central counter parties. To this end, ASIC and the Australian Government recently consulted on draft regulations and rules that would implement a clearing obligation in certain OTC interest rate derivatives.

A great deal of work remains to be done to implement the remaining OTC derivatives reforms. In particular, it is necessary to introduce requirements for market participants to exchange margin for non-centrally cleared trades. Law reform may also be necessary to remove some legal impediments to margining. The Australian Prudential Regulation Authority (APRA) is likely to consult on implementing these requirements for their regulated population in 2016. ASIC, APRA and the Reserve Bank of Australia are also reviewing the liquidity of OTC markets, to determine if a trading mandate is appropriate for Australia. They are likely to seek feedback later this year outlining the criteria which will be used to determine if a product should be subject to this mandate.