Dodd-Frank 30 Day Countdown: Day 20

Australia Contemplates New (but Limited) Derivative Market Reforms

Australia is moving closer to fulfilling its G20 pledge to decrease systemic risk in the OTC derivatives market by implementing national regulation. Last week, Australia’s Council of Financial Regulators (the Council) released a discussion paper about what those regulations may look like.

While the Australian OTC market is significant, with more than US$100 billion traded daily, it is a small piece of the estimated US$600 trillion worldwide OTC derivative market.  Accordingly, the Council suggested that Australia should take a more judicious approach than its U.S. colleagues did with Dodd-Frank.  The Council explained that, “In practice, the only OTC derivatives products traded in the Australian market that might currently meet the tests of systemic risk reduction, clearing viability and global harmonization, are interest rate derivatives and some foreign exchange derivatives, namely forex options.”  The Council concluded that “it is likely that there would be some scope for central clearing of at least some of this activity.”

This scope of regulation, however, may be quite limited. The Council emphasized that it expects that “Australian requirements would be harmonized” with the U.S. Treasury’s proposed exemption for foreign exchange swaps and forwards from a clearing requirement.  Thus, the Council seems to be suggesting that Australia should limit regulation to its most robust OTC markets and then further limit regulation because those markets have been largely untouched by Washington.

The council is seeking public feedback on its discussion paper until August.  It will then make legislative recommendations.  The full report is available at http://www.rba.gov.au/publications/consultations/201106-otc-derivatives/pdf/201106-otc-derivatives.pdf

-Alex Asen co-authored this post