Asia’s new clearing counterparties (CCPs) may struggle, according to consulting firm Celent, in a new report, ‘OTC Derivatives in the Advanced Asian Economies’.
Celent says that as a result of reforms stemming from G-20 OTC derivatives compliance, the jobs of central clearing and trade repository have become new business opportunities that will mushroom in Asia.
Celent points out that the dominant role of local exchanges in the Asian markets offers them an opportunity to capture this business.
Whilst there will be significant growth in centrally-cleared trades,the stampede as each country sets out to have its own national, flag-carrying OTC derivatives clearer means there may be an abundance of such market infrastructure operators, diluting volumes, and preventing some of them from being financially viable.
It may also transpire that due to extraterritoriality issues, western regulators may not recognise all of Asia’s new CCPs.
The cost of trading swaps will go up says Celent. Central clearing service providers will charge fees for their service, a new cost previously absent from of bilateral trading. Uncleared OTC trades will attract higher capital charges and possibly other costs associated with margining.
Celent predicts that Asia will continue to account for a small share of global volume in the next five years. The five markets in Australia, Hong Kong, Japan, New Zealand, and Singapore account for over 90% of OTC derivatives trading volume in Asia and reaching a total of US$290 trillion in 2012.
Foreign exchange derivatives account for 72% of trading volume in these five countries. Interest rate derivatives rank second with 17%.