Today the Australian Government issued a proposals paper for the mandatory central clearing of interest rate derivatives denominated in USD, EUR, JPY and GBP, seeking stakeholder views before the mandate is implemented. In itself, this proposal is not surprising. However, the paper also provides guidance on the new Australian government’s thinking on the local implementation of G20 OTC derivative reform.

The proposals paper (a link can be found here) is the next step in the process for mandating the clearing of interest rate derivatives denominated in United States Dollars, Pounds Sterling, Euro, and Japanese Yen. This has been expected by participants in the Australian derivatives market as it is consistent with the recommendations of the Australian financial regulators released in July of last year (a link to our Alert on this can be found here).

As anticipated, the new clearing obligation, when implemented, is to be applied only to large financial institutions with significant cross-border activity in these products, and an indicative (and short) list of those entities is included in the proposals paper.

The paper indicates that the next step towards the mandate (a ministerial determination) would be taken in the second calendar quarter of 2014, followed by rules in late 2014, with the obligation to clear commencing in early 2015. The paper does not propose the imposition of clearing requirements on other entities or for other derivatives. However, it does contain some statements in relation to the potential for a mandate to be imposed on Australian dollar denominated interest rate derivatives (AUD IRD) in the future. The proposals paper notes that Australian financial regulators have reported that there would be a substantial benefit from increased clearing of AUD IRD and that there is an ‘emerging case’ for mandating central clearing of AUD IRD, now that there are two CCPs which have regulatory approval to offer clearing in Australia. However, although feedback is sought from stakeholders on this, no clear path (no pun intended) is set for mandating the clearing of any other derivatives. Any future mandate would need to wait for the recommendation from future market assessments conducted by the Australian financial regulators.

Similarly, the proposals paper states that no decision is to be taken on requiring the use of trading platforms in Australia, until further reviews by Australia’s regulators have been conducted. Interestingly, the proposals paper does make two proposals in relation to Australia’s trade reporting regime:

  • that the exemption for end-users from having to report transactions be made permanent; and
  • that the application of the regime to holders of an Australian financial services licence take into account the extent of the derivatives authorisation in that licence.

The closing date for submissions on the proposals paper is 10 April.