The overseas banks that dominate Asian OTC derivatives markets could be forced to rein in their activities by the cost of complying with diverse new regulatory regimes, according to a report commissioned by the International Swaps and Derivatives Association (ISDA) published this week.
A survey of Asian market participants conducted by Celent found that 57% intended to increase their use of OTC derivatives. Among those polled, 58% believed upcoming regulations would have no effect on their use of derivatives, compared with 34% who said they were likely to trade more; only 8% who predicted a negative impact.
Yet the report - released at ISDA's AGM in Singapore - claimed at least some banks would have to scale down or even withdraw from some markets "if new regulatory hurdles, capital charges, reporting requirements, and rising costs make their businesses untenable".
It contrasted Singapore and Hong Kong - both modestly regulated hubs for regional activity - with unspecified markets that were "content to create barriers which serve to protect the local market and encourage trading in more exotic instruments elsewhere".
Although US and European regulation will affect Asian markets - especially on clearing - these fragmented Asian markets are "united in their diversity", said the report. "Local factors are overwhelmingly important, with local regulations, local market drivers, and local customs having a strong impact on each country and thus on market participation", it said.
Specifically, market participants could find it harder to clear trades because of fragmented central counterparty clearing (CCP) requirements across Asia. Concentration risk created by the regional shift towards CCP could compound operational risk faced by participants dealing in multiple Asian markets. Meanwhile, proposals in India, China and Korea to mandate onshore clearing could create conflicts between domestic and host regulators for some banks.
According to the Celent poll, more market participants said they are likely to use local and regional clearing houses, compared with 38% who said they would opt for global ones. Currently, 46% claimed not to be centrally clearing any of their trades but only 15% expect to decrease their use of centrally cleared OTC derivatives.
The US$42.6 trillion Asian OTC derivatives market is primarily focused on FX, which accounted for 76% of the market last year. Underdeveloped regional bond markets and negligible liquidity will likely continue to stifle growth in interest rate swaps, the second most traded category with 18%.
Meanwhile, a poll of 150 pan-regional participants at a Clearstream Asia conference in Singapore earlier this week found that 92.6% identified sourcing collateral to cover global exposures a high or very high priority. Yet only 38.7% claimed to have access to a collateral optimisation system.
Clearstream's head of global securities financing, Stefan Lepp, said in a statement the lack of access was less a function of a collateral shortage than of inefficient collateral management in a market characterised by fragmented liquidity.