Although Asian membership of the G20 is restricted to Australia, China, Indonesia, Japan and Korea, all of the most important and most ambitious financial centres in Asia are pursuing the mandate of reporting OTC derivatives to trade repositories.
Like Europe, the Asian regulatory landscape is fragmented. Unlike Europe, where the European Securities and Markets Authority (ESMA) sits between national regulators and the European Commission and Council, there is no regional regulator to impose any kind of consistency on regulatory activity at the periphery. As a result, the G20 trade reporting initiative is being implemented – if it is being implemented at all - on an individual basis by each country in the region.
The one consistent presence throughout the region is the Global Trade Repository (GTR) built by the Depository Trust & Clearing Corporation (DTCC). The American central securities depository (CSD) has secured the sole repository licences issued in Hong Kong, Japan and Singapore and the same by default in Australia, where regulatory openness to other repositories has yet to attract a competitor.
“We are currently the only licensed repository in Japan and Singapore and in Australia we operate under a regime called Prescription and we are the repository that firms use,” says Stewart Macbeth, CEO of DTCC Derivatives Repository Limited (DDRL) in London, and chief product development officer of DTCC Deriv/SERV. “It is not quite the same situation as us being the only approved repository. These jurisdictions are all open to others, but other repositories will need to see a business proposition that they can take on. The reason that we can make a business out of it is because we have built a global business and can offer economies of scale as well as help firms that have reporting obligations in multiple jurisdictions.”
A familiar provider offering a global service certainly appeals to swap counterparties from outside the region, especially since European-style two-sided reporting is the norm in Asia. However, indigenous competitors are in prospect. The Association of South East Asian Nations (ASEAN) is planning a common trade repository to service derivatives counterparties in its member-states - Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Myanmar, Cambodia, Laos and Vietnam – even though the individual members are also establishing their own trade repositories. The INTR (Indonesia National Trade Repository) was the first to open a trade repository, but Singapore has gone live since, and Malaysia is in the middle of a public consultation process which is expected to lead to the establishment of a repository in Kuala Lumpur.
The Malaysian OTC derivatives market is not large, but it is growing. The consultation paper, published jointly by the central bank (Bank Negara Malaysia), the securities Commission Malaysia) and the bank deposit insurance agency (Perbadanan Insurans Deposit Malaysia, or PIDM) on 20 November 2013, noted that the notional outstanding amount of OTC derivatives in Malaysia had increased from RM338 million in 2003 to about RM1.3 trillion by June 2013. The three regulatory agencies are currently digesting the feedback received, but the consultation paper firmly proposes capturing all asset classes ( swaps, forwards or options with an underlying reference to foreign exchange, interest rates, credit, commodity and equity) and every type of counterparty (save foreign-owned subsidiaries) plus two-sided reporting (including collateral) on T+1 (though the work can be outsourced).
Importantly, the Malaysian regulators propose a phased introduction of reporting, starting with banks and investment banks, followed within six months by brokers and fund managers. Full reporting will not start until 18 months have elapsed. The proposed reporting template has 79 fields, including collateral. The regulators have committed themselves to publishing “key statistics,” such as notional outstandings and transaction volumes, extracted from the data they collect.
Japan is a much larger market. At June 2013, the Bank for International Settlements reported $15.2 trillion in notional amounts outstanding in Japanese Yen foreign exchange derivatives. Interest rate swaps racked up another $55 trillion in notional outstandings, credit default swaps $196 billion and Japanese equity-linked OTC derivatives a further $710 billion. And the Japanese regulators have followed an aggressive path towards meeting the G20 requirements.
The Japanese Financial Services Agency (FSA) mandated the reporting of swaps from 1 April 2013. Counterparties have a choice of reporting credit, interest rate, equity and foreign exchange derivatives to the DTCC-owned DTCC Data Repository Japan (DDRJ) or to the FSA itself. So far, the American repository is winning the bulk of the business, because of simpler connectivity, and the ability (especially for foreign swap counterparties active in the market) to report in the same fashion as they do to other DTCC-owned trade repositories around the world.
DTCC actually monopolises trade reporting in Australia, where the regulator, the Australian Securities and Investments Commission (ASIC), is implementing a phased approach to reporting of interest rate, foreign exchange, credit, equity and commodity derivatives (except electricity contracts). In the first phase, ASIC obliged all counterparties registered as swap dealers with the Commodity Futures Trading Commission (CFTC) in the United States - in practice, that meant ANZ Banking Group, Commonwealth Bank of Australia, Macquarie Bank, National Australia Bank and Westpac Banking Corporation - to begin reporting their OTC derivative trades to the DTCC-owned GTR from 1 October 2013.
Phase two commenced on 1 April 2014, and phase three follows from 1 October 2014. This obliged major financial counterparties – defined by ASIC as those with at least A$50 billion of notional outstandings – to report rates and credit swaps from 1 April 2014, and other asset classes from 1 October 2014. Other regulated deposit-taking banks and securities trading firms are expected to report rates and credit from 1 October 2014, and other asset classes from 1 April 2015. At present, entities to report their OTC derivative activities at all.
Importantly, in Australia both counterparties are expected to report, though the task can be delegated to a third party, and foreign counterparties can report to trade repositories outside Australia if ASIC reckons the standards are equivalent. ASIC has taken a fairly relaxed approach, giving time-limited relief to entities struggling to attain full compliance in phase one, and was expected to do the same in phase two. As it happens, DTCC is supporting its repository in Australia from Singapore, which has played host to one of the global data centres of the DTCC since December 2012, and where swap trade reporting also got under way in the autumn of 2013. The Monetary Authority of Singapore (MAS) published on 31 October 2013 its response to feedback on a consultation paper it released on 26 June 2013.
The final regulations took effect the same day, obliging swap counterparties to report interest rate and credit derivatives immediately, but allowing banks to postpone compliance until 1 April 2014, other financial entities until 1 July 2014, and “significant derivatives holders” until 1 October 2014. Reporting of other asset classes, such as foreign exchange, equity and commodity derivatives contracts, are postponed to a second phase, which will start in October 2014.
In early November last year a group of 20 banks, gathered under the auspices of the International Swaps and Derivative Association (ISDA), told the MAS they had pledged themselves to start reporting standardised rates and credit derivatives by 3 February 2014. “MAS welcomes the initiative on the part of ISDA and the signatory banks to commence trade reporting of OTC interest rate and credit derivatives in Singapore ahead of the mandatory timeline,” said Ravi Menon, managing director at MAS, in statement released at the time. “This move will enhance transparency, build confidence, and contribute to more effective functioning of our derivatives market.”
On 6 November 2013 DTCC announced that it had received its licence to operate a trade repository from the MAS, by which time the first bank was already reporting trades. “The implementation of way partnership between MAS, the industry and ourselves and the result leverages emerging global OTC reporting best practices,” said Peter Tierney, CEO of the DTCC Data Repository (Singapore) PTE Ltd (DDRS) and regional head of trade reporting for DTCC in Asia.
DTCC also plans to support OTC derivative trade reporting to the repository established by the Hong Kong Monetary Authority (HKMA), initially by offering global banks the opportunity to report to the HKMA via its London entity, DTCC Derivatives Repository Limited. This reflects the early decision by the HKMA in December 2010 to set up its own trade repository (HKTR) and to link it directly to the Hong Kong Exchanges and Clearing Limited (HKEx) central counterparty clearing house for the clearing of swap transactions. HFTR went live in July 2013.
The HKMA has since 2010 worked with the securities market regulator, the Securities and Futures Commission (SFC) to ensure reporting requirements developed in tandem with clearing requirements. However, slow progress irked market participants, and in August 2013 the HKMA introduced a set of interim reporting requirements. These rules, which oblige banks to report specified OTC derivatives transactions among themselves to the HKTR, will remain in force until a full regulatory regime comes into effect.
Other Asian countries are also progressing towards finalising their trade reporting mandates. In India, where OTC derivatives have had to be reported since 2007, the Reserve Bank of India (RBI) has now mandated reporting of interest rate, credit and foreign exchange derivatives to the Clearing Corporation of India Limited (CCIL). The RBI is promising to assess market trends and to make reporting of equity and commodity derivatives compulsory as they become widely used.
In Korea, host to the largest OTC derivatives market of any emerging economy in Asia, also has swap reporting requirements that pre-date the G20 agreement. Work is now in hand to ensure the local requirements match global ones. In China, where compulsory clearing of interest rate swaps is centralised at the Shanghai Clearing House, it is not yet clear whether trade reporting will be mandated or not. In Indonesia, where OTC derivatives activity is low even by emerging Asian standards, equity and commodity derivatives are traded entirely on-exchange, and so are already fully reported. Interest rate and foreign exchange derivatives are already reported to the central bank as well. In practice, OTC derivative activity in the country is confined to foreign exchange. Exceptionally, the country is not even planning to introduce compulsory clearing, let alone trade reporting.
But then Asia outside financial centres such as Hong Kong and Singapore – which have more in common with London and New York than Jakarta or Seoul - as a whole accounts for a relatively low proportion of OTC derivative activity. When ISDA published a study of the Asian OTC derivatives markets in April 2013, it estimated that ten countries in Asia supported US$42.6 trillion in notional outstandings across foreign exchange, interest rates, equity, commodities and credit default swaps – a relatively small figure shrunk further, thought ISDA, by portfolio compression.
That said, the same study thought OTC derivative activity had grown since 2010, with turnover hitting US$186 trillion in 2012 (though foreign exchange derivatives accounted for more than four in five dollars traded). Which is more than can be said for exchange-traded derivatives. In 2013, the Futures Industry Association said that futures and options exchanges in Asia reported 7.29 billion contracts, down 3.1 per cent on 2012, and more than a quarter on the 9.8 billion contracts traded in 2011. Unlike Europe, however, exchange-traded derivatives do not have to be reported to trade repositories.