Singapore Exchange (SGX) president Muthukrishnan Ramaswami has laid out plans for his bourse to take a regional role in OTC derivatives reform, as markets across the globe seek to reduce systemic risk in the swaps market.
“Our vision is to be the gateway to Asia,” Ramaswami told theTRADEnews.com. “In the exchange-traded space, you can already come to SGX and trade equity futures across Asia, including the Nikkei, the China A50, the Indian Nifty – and soon we will add an Indonesian index. As OTC derivatives reforms accelerate, we want to provide a single market where investors can gain wide exposure across Asia.”
SGX already uses its derivative clearing service, AsiaClear, to offer OTC clearing for commodity instruments, financial derivatives and FX forwards across all Asian currencies. But the range of instruments covered is likely to increase in the near future.
In February, regulatory body the Monetary Authority of Singapore (MAS) issued a consultation paper on the regulation of OTC derivatives in Singapore. The paper proposed to broaden the current regulatory regime for clearing facilities to OTC derivatives and introduce new rules for the reporting of trades to data repositories. Unlike reform proposals in the US and Europe, moving OTC derivatives onto exchange-like platforms are not part of the MAS proposals.
In its response to the feedback it received on the consultation, MAS said most respondents had expressed support for its proposals, which would effectively extend the definition of instruments that must be cleared to OTC derivatives contracts. Respondents also expressed broad support for the introduction of a new authorisation regime for clearing facilities and trade repositories.
The SGX proposals are inline with G-20 commitments made in 2009 to standardise swaps where possible so they can be made eligible for clearing and subject to better oversight for the purposes of risk management.
“We are particularly happy with the alignment with the G-20,” said Ramaswami. “Banks that don't have the scale to join a global clearing house can join us. We look forward to expanding the asset classes we serve beyond non-deliverable forwards and interest rate swaps to more asset classes. We won’t be one clearing house for the world, but we would like to offer clearing for international instruments and be the dominant provider in Asia.”
Ramaswami intends SGX to become a risk management centre by enabling market participants to trade futures and other derivative instruments across Asia, but keep their open interest at SGX’s AsiaClear, rather than individual domestic markets. This will allow investors to manage their risk in a single place. He added that SGX would look to secure global linkages with the US and Europe to ensure that the exchange remains a conduit for Asian flows from global markets.
Global oversight
A key part of the new OTC derivatives trading environment is the reporting of transactions through trade repositories. US post-trade utility the DTCC announced its intention on 21 May to create a repository in Singapore that would satisfy the need for data to support market supervision. By establishing a Singapore data centre to serve as its Asian repository, the DTCC aims to provide regulators and market participants visibility into positions and exposures.
“We expect trade repositories to maintain high standards of data integrity and confidentiality and we will establish an appropriate framework for regional and global regulators to request trade repository data based on internationally agreed principles,” stated MAS.
The DTCC has said Singapore provides an ideal base for its own global ambitions.
"A trade repository can help provide certainty and stability to market participants and regulators alike," said Dan Cohen, managing director and head of government relations, DTCC. "During the Lehman Brothers crisis, figures provided by our Trade Information Warehouse calmed markets and helped to diffuse a market meltdown prompted by rumours circulating in the market. The MAS document was helpful in our decision, providing confidence that we had found a regulatory regime that was suitable for our global reporting ambitions."
In Singapore, MAS has issued two further consultations designed to speed the process towards implementation. The new consultations cover practical reforms to the country’s Securities and Futures Act and the Financial Advisers Act in line with the conclusions of the original consultation and feedback. The two new consultations will end on 22 June.
Australian options
Clearing and reporting services for OTC derivatives are also gaining ground in other parts of Asia Pacific. Last month, the Australian Securities Exchange (ASX) launched Equity OTC Clear, a clearing service for ASX participants to anonymously report transactions in OTC equity options. The ASX service does not require participants to lodge an International Swaps and Derivatives Association contract. It also provides investors with flexible expiry dates and strike prices.
“The OTC contract will portfolio margin against listed equity option positions,” said David Stocken, senior manager, institutional sales at ASX. “Investors can also lodge stock as acceptable collateral against their OTC position in the same way they can lodge stock against their regular ASX-listed equity options.”