In the next step towards compulsory clearing of AUD interest rate swaps, the Australian Government has released a Proposals Paper on the mandatory clearing of Australian dollar over-the-counter (OTC) interest rate derivatives by large financial institutions.

The Proposals Paper builds on the Australian Government’s February 2014 Proposals Paper in which it proposed a central clearing mandate for OTC interest rate derivatives denominated in US dollar, euro, yen and British pounds (the G4 currencies). The recent paper extends this proposal to include OTC interest rate derivatives in Australian dollars.

Under the proposal, the clearing requirement would only apply to large financial institutions, the scope of which is subject to further consultation, with two alternatives proposed:

Option A defines the class of entities captured by the clearing mandate as:

  1. any domestic financial entity with $100 billion or more gross notional OTC derivatives outstanding;
  2. any foreign financial entity with $100 billion or more gross notional OTC derivatives outstanding booked or entered into in Australia;
  3. any foreign financial institution with $100 billion or more of gross notional OTC derivatives outstanding with domestic and foreign financial entities subject to the clearing mandate in Australia under the first two rules above; and
  4. any entity that opts in to a mandatory clearing obligation in G4-IRD or AUD-IRD.

Option B defines the class of entities captured by the clearing mandate as:

  1. any domestic financial entity with $100 billion or more gross notional OTC derivatives outstanding;
  2. any foreign financial entity with $100 billion or more gross notional OTC derivatives outstanding booked or entered into in Australia;
  3. any entity regulated as a swap dealer in the US; and
  4. any entity that opts in to a mandatory clearing obligation in G4-IRD or AUD-IRD.

The threshold would be calculated on a legal entity basis, and public entities (such as central banks) would be excluded from the requirement.

At this stage, there is no recommendation that the clearing obligation be extended to non-dealers. However, the Australian regulators have stated they will continue to keep this under review. The Australian regulators will also continue to monitor the use of North American, European and Japanese referenced credit derivatives.

The proposal provides for a Ministerial determination to be made later this year for OTC interest rate derivatives in all five currencies, with obligations in relation to Australian dollar OTC interest rate derivatives potentially subject to a later compliance date. The proposed timings mean:

  • the draft Ministerial determination would be released for comment in the third quarter of 2014;
  • the determination and regulations would be made in late 2014; and
  • the clearing mandate would come into force in early 2015.

Reflective of the ever increasing global regulatory environment for OTC derivatives, the Australian Government also noted that the clearing mandate in relation to AUD interest rate derivatives may be coordinated with the introduction of similar obligations in key overseas jurisdictions.

Comments in relation to the proposal are due by 1 August 2014.