Australia: Australian regulator proposes wider interest rate swaps clearing

On 8 July 2014 the Australian Government issued a paper seeking industry views on its proposal to require central clearing of certain AUD-denominated interest rate derivatives ("AUD IRDs"). The proposals paper follows recommendations made by the Council of Financial Regulators in April 2014 that the Government consider a central clearing mandate for trades between internationally active dealers in AUD IRDs. These proposals are in addition to those made by the Government in February 2014 to require central clearing of interest rate derivatives in G4 currencies ("G4 IRDs").

The move to require central clearing of AUD IRDs represents a departure from the approach initially adopted by the Government in 2013. At that time, it was observed that the domestic dealers were "voluntarily" moving to a central clearing model for trading in AUD IRDs and that it was only necessary to require clearing in G4 IRDs. Since then, the Government believes that good progress has been made by market participants in preparing for central clearing of over-the-counter (OTC) derivatives in Australia and that the incremental cost of requiring central clearing of AUD IRDs would be minimal. Extending the central clearing mandate to AUD IRDs would also be consistent with the approach of overseas regulators, which are requiring central clearing across a wide range of OTC derivatives, and would assist with the Australian regulatory regime achieving "substituted compliance" status with overseas regulators, the Australian Government argues.

These proposals, if implemented, would see a Ministerial determination made in the second half of 2014 that will allow the Australian Securities and Investments Commission to make rules regarding central clearing of AUD IRDs and G4 IRDs. It is proposed that the central clearing mandate would be limited to large financial institutions with significant levels of cross-border activity. The key issue of concern to industry participants will be how this is defined. The proposals paper refers to a $100 billion notional amount of outstanding derivatives booked or entered into in Australia.

The proposals paper also specifically states that there is no current intention to require central clearing of OTC derivatives for corporate end users and proposes to exclude public entities (such as central banks) and intra-group trades from the mandate.

Submissions on the proposals close on 1 August 2014.

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