European treasurers who thought their EMIR compliance projects were tough going should spare a thought for their Asia Pacific counterparts. After all, a pan-European corporate, with a footprint in every Western European country only had to deal with two sets of regulations, at most; the EU and Swiss regimes. For a pan-Asia corporate with operations in each of the 17 independently regulated Asian markets, the regulatory headache is inevitably going to be much more severe.
The market for OTC derivatives in Asia is small in relative terms, comprising as it does, a mere 8% of the current global turnover. But demand for risk management products is growing. In 2012, there was $42.6 trillion in notional outstanding in the Asian financial markets – a 25% increase from 2011 figures according to a Celent study published last year.
With derivatives now assuming increased importance to the treasurers of Asia-based corporates, understanding the changes required in the jurisdictions within which the company operates will be vital. In this article we will look at the current state of play in the Asian derivatives markets, how the changes will impact corporates, and how the regulatory environment might develop in the years ahead.
The state of play
So, where are we at the moment? As of July 2014, four of the major jurisdictions in the Asia Pacific region – Australia, Hong Kong, Singapore and Japan – have begun to introduce regulations in line with the reform principles for OTC derivatives as set out by the G20 committee in 2009. The general objectives of these regulations are broadly the same as under Dodd-Frank and EMIR. However, each country is moving at its own pace and with its own priorities.
But some common trends can be observed. Already, we can see that Asia’s regulators have each decided to take a more phased approach with different deadlines for different types of market participants. A majority of countries seem to be leaning towards an EMIR-like reporting model in which both sides report, and most have begun with the creation of trade repositories and reporting requirements before tackling centralised clearing. But, as we will see, that is more or less where the similarities end.
Australia, for instance, began by introducing mandatory trade reporting for registered swap dealers – typically large banks – back in October 2013, which was followed in April 2014 by a deadline for major financial institutions to begin reporting interest rate and credit derivative trades. The timetable for other financial institutions and corporates to begin reporting their trades has not yet been confirmed. An October deadline for other buy-side organisations to begin reporting is expected to be postponed by the Australian Securities and Investments Commission (ASIC), and it is also looking likely that Australia will follow the precedent set by Dodd-Frank and exempt end users such as corporates from the reporting obligation. Central clearing proposals are still in the consultation stage and a mandate is expected in 2015.
Reporting in Singapore, meanwhile, began around the same time as Australia but was restricted to interest rate and credit asset classes. At first, reporting was voluntary but it became mandatory for a prescribed list of banks in February; a list which was expanded to include most banks and dealer entities in on 1st April. A deadline for corporates to begin reporting – the first requirement that will be applied outside the banking sector – has been confirmed for September, but as yet there has not been any confirmation of the timetable for central clearing.
Japan was the earliest mover in Asia Pacific, and the only jurisdiction to attempt the introduction of reporting and central clearing in parallel. Yen-denominated interest rate swaps and credit default swaps that referenced Japanese indices came under mandatory clearing requirements in November 2012 and expansion of this mandate is currently under discussion. Reporting for banks also began at the same time for each of the main asset classes, with the exception of commodities.
Finally, in Hong Kong all the necessary legislation is in place but is, as yet, to come into full effect. Clearing mandates are expected to become effective later in the year – although, at the time of writing, a formal announcement from the Hong Kong Monetary Authority (HKMA) has not yet been made. A formal mandate for trade reporting, to replace an interim rule that requires banks to report interest rate and non-deliverable forward (NDF) trades to the Hong Kong Trade Repository (HKTR) is also expected to be in effect by the beginning of 2015.
Chart 1: Reporting requirements in Asia Pacific countries
Entities currently in scope
Asset classes currently in scope
Australian banks and financial entities
Credit, IRS, Equity, Commodities and FX
Banks and dealer entities
IRS and FX
Credit, IRS, FX and Equities
Banks and financial entities
IRS and NDF
Taking a more measured, incremental approach to implementation does have certain advantages. We saw in Europe, for example, how onboarding bottlenecks, and a host of other problems, were created because of the need to do so much in such a short space of time. Even some of the banks who, unlike corporates, have vast armies of compliance experts, confessed to be struggling under the sheer weight of the regulatory burden during the implementation stage of EMIR. For most entities in Asia, however, the load should be more manageable.
“There is awareness of the fact that each of the segments have different challenges,” says Peter Tierney, Regional Head, Asia at DTCC. “The large banks are quite sophisticated from a technology perspective, and also have experience reporting across jurisdictions. But at a corporate level, the sophistication – in terms of tracking and managing trades – is different. I believe that regulators in Singapore and Australia recognise these different states of readiness.”
There are also signs that Asia Pacific countries are waiting to see more precisely what impact US and European regulation will have on the derivatives markets. Taking that approach, the regulators are able to learn from what has worked well and apply those lessons in their own jurisdictions. “We have spent a lot of time talking with regulators across Asia about trade reporting processes in other regions as well as provided insights on how market participants are already reporting elsewhere,” says Tierney.
A regulatory ‘patchwork’
Does the fact that the region is looking to learn from other regulators mean that, somewhere down the line, we will see the same level of regulatory consistency as in Europe or the US? That seems improbable, given that it would require each jurisdiction in the region to surrender some sovereignty over their domestic markets to a pan-Asian regulatory organisation. And with regulation bringing with it such great opportunities for arbitrage, that is difficult to conceive, says Zohar Hod, Global Head of Sales and Support at SuperDerivatives. “I do see some harmonisation,” he begins. “But for some countries in Asia it is simply not in their interest. The whole point of China launching six different exchanges, for example, is that they want to become the centre for financial transactions. I think they are going to be taking an approach that says ‘here it is going to be a bit different’, in order to attract business to the Shanghai markets.”
Might the lack of harmony undermine the push to shine more light on these markets which was, after all, the fundamental goal of the reforms in the first place? One expert who is worried that might be the case is Malavika Shekar, a Senior Consultant for the capital markets advisory firm GreySpark who recently published a study on the regulatory progress which made in Asia’s OTC derivatives markets. “A myriad of different regulations are cropping up across the region without one body having oversight of the big picture,” Shekar says. “This certainly has the potential to undermine the G20 goals of making the global markets more transparent.”
On the ground, it could pose a huge challenge for corporate treasurers and other end users. There will be some jurisdictions in Asia where both corporates and banks will be required to report, somewhere only the bank has to and some where all asset classes are subject to reporting requirements. Interpreting these rules will require some time. “Corporates will need to ensure they have read, interpreted and understood the laws and regulations correctly across a number of different countries,” says DTCC’s Tierney.
In the years ahead, hedging practices for Asia Pacific’s corporates will clearly be shaped, enormously, by the G20 market reform commitments now being implemented. It is not just regulation from within that is going to drive change through the region’s markets, wherever Dodd-Frank and EMIR apply in any jurisdiction in which US and EU institutions operate, and both require derivatives contracts to be cleared through central counterparties (CCPs) approved by the European Securities and Markets Authority (Esma) or the US Commodity Futures Trading Commission respectively. What’s more, even Asian market participants will find Dodd-Frank and EMIR rules difficult to escape from if they are dealing with US or EU counterparties, since they will also be required to comply with the respective regulations regardless of where their transactions are made.
Clearly the regulatory framework in Asia Pacific remains in a state of flux. But with the extraterritorial reach of regulations elsewhere adding an extra layer of complexity to the web of new rules now emerging in the region, corporates really have no time to lose. Even in jurisdictions, such as Australia, where corporates may well find themselves exempt from trade reporting obligations – and clearing mandates too, if they keep below certain thresholds – the impact will still be felt. With trades shifting from bilateral trading and dark pools to clearing and electronic trading platforms, corporates end users may have to make the transition anyway to retain their access to liquidity.
So what can treasurers do now to prepare themselves? The first step should be to perform a careful examination of the company’s treasury technology and its capabilities when it comes to types of data that might need to be reported. “The biggest problem for firms reporting under EMIR was gathering all the right information and collating it,” explains SuperDerivatives’ Hod. Asian treasurers won’t have to climb that same, steep learning curve if they begin their preparations now though. That might involve taking a report from DTCC or one of the other swap data repositories and then figuring out what, if any, gaps there are. “Perform an exercise to help you understand what needs to be reported,” he says. “I would definitely do that in order to be prepared for any future requirements.”
Corporates who need to begin reporting in Singapore in September should already have a good idea about where those gaps are, but treasurers elsewhere in Asia might need to wait a little bit longer before they can begin an evaluation. “For many countries, the necessary format to report in is still non-existent,” adds Hod. “For that reason, I wouldn’t worry about it for 2014 – but it is certainly something I would put on my future project list if I were a treasurer.” The corporates in the region that do this might just find their compliance projects actually run more smoothly than those of their counterparts in Europe and the US did.
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