The Korean government has approved new laws that pave the way for central counterparties (CCPs) to clear OTC derivatives transactions, starting with interest rate swaps.
The Legislation and Judiciary Committee of South Korea’s National Assembly approved a revised version of the Financial Investment Services and Capital Markets Act (FSCMA) yesterday, which will allow CCPs to seek approval to clear swaps.
CCPs for swaps will be approved depending on the types of financial products they seek to clear.
A statement from Korea’s Financial Services Commission (FSC) said the establishment of CCPs for OTC derivatives would help to reduce counterparty risk and establish effective risk management processes, particularly for IRSs, which represent the highest proportion of OTC derivatives volumes in Korea. At the end of 2011, the Korean OTC derivatives market was worth KRW690.4 trillion (US$588 billion).
The FSC will seek to approve its first CCP for swaps within three months.
“Creating a CCP in Korea as soon as possible will help prevent flight of clearing demands to overseas competitors and survive growing competition among global CCPs,” read the FSC statement. “With the introduction of a CCP, Korea will be able to implement the G20 agreements and bring OTC derivative regulations in line with global standards.”
Korea will join other Asian nations including Singapore, Hong Kong and Australia in implementing OTC derivatives reforms, that will lead to many swaps being traded on-exchange and cleared through CCPs, where possible. US and European regulators are implementing new swaps trading rules via the Dodd-Frank Act and the European market infrastructure regulation respectively.