Dodd-Frank 30 Day Countdown: Day 19

Asia On Par with U.S. OTC Derivative Reform

As previously reported (on Day 25 of this countdown), Mary Schapiro, SEC Chairperson testified before the House Financial Services Committee on June 16, 2011 regarding “Financial Regulatory Reform: The International Context.”  In her remarks, Schapiro noted that the G20 agreement contemplates that every G20 country will have completed the legislation, rulemaking and implementation of these reforms by the 2012 deadline.   She pointed out that while progress is being made internationally, only Japan has enacted OTC derivatives reform legislation since the September 2009 G20 Communiqué, and its legislation only covers clearing and reporting, not mandatory trading.

Japan is relatively advanced in this regard with regulation requiring many domestic OTC derivatives to be cleared, a trend which is happening generally in Asia more quickly than in the U.S. or in Europe.  In addition to central clearing requirements, Japan significantly reinforced OTC derivatives regulation in April of this year.  The government amended the regulations under the Financial Instruments and Exchange Act (FIEA) and tightened the rules relating to the marketing of derivatives transactions and structured products by the financial services sector.

Singapore, Hong Kong and Korea are also either providing or planning to provide clearing services, despite implied criticism from the U.S. that some Asian jurisdictions risk becoming hotspots for “lax regulation.”

Korea in particular seems poised to quickly enact clearing and trading requirements in line with Dodd-Frank.  The Korean regulatory framework has actually been stricter than U.S. OTC derivatives regulations, including the G20 Communiqué, in recent years.  Korea views clearing requirements as both in line with Korea’s interests, and helpful to international cooperation.  Clearing services will of course increase charges by margin and default fund requirements, and Korea figures to suffer more than most countries in this regard.    The largest percentage of the Korean derivatives market is FX derivatives, which involve the exchange of principal amounts in different currencies.  The volatility in FX derivatives exposure, far greater than typical interest rate products, will translate in expensive margin and capital requirements.

In Hong Kong, the Hong Kong Securities and Futures Commission is moving ahead with plans to implement a phased approach to imposing a regulatory regime on the OTC derivatives market.  A spokesman the Commission stated that the Hong Kong Monetary Authority is set to roll out a trade repository and also plans establish an OTC derivatives central counterparty clearing house.

Singapore’s Monetary Authority also intends to meet its G20 commitments and implement Singapore’s clearing infrastructure for OTC derivatives (Asiaclear) which complies with international standards. A spokesperson for the Authority insisted that despite remarks by U.S. regulators, Singapore “has not sought to lure financial business away from other centres through regulatory arbitrage.”

-Pei Kuo co-authored this post