- Future growth potential of global markets for OTC derivatives means that EU- and US-style central clearing mandates will be implemented in Asia-Pacific trading hubs.
- Asia-Pacific buyside firms unprepared for the future complexity of central clearing regulatory standards across the region.
Many Asia-Pacific institutional investors are unprepared for the introduction of regulatory reforms governing the US$600 trillion global OTC derivatives market, according to a new piece of research by GreySpark Partners - an international capital markets consulting firm. The report, Asia-Pacific OTC Derivatives Clearing 2014, explains the impact the introduction of the Dodd Frank Act in the United States and the European Union's European Market Infrastructure Regulation (EMIR) will have on the OTC derivatives markets in the APAC region. The report also examines the criteria investors should look for in selecting a sellside clearing broker to meet the new regulatory requirements.
Braian Szwarcberg-Poch, managing director of GreySpark's Sydney office and report co-author, said: "The global OTC derivatives reforms greatly incentivise clearing. Currently, the overall cost of a cleared and uncleared trade is the same -- the higher capital requirements for bilateral trading offset the sharper pricing and margin requirements associated with a cleared trade. As liquidity shifts to the cleared markets, trading bilaterally will become increasingly unfeasible and AsiaPac buyside firms will need to define their clearing strategy in order to remain competitive."
Malavika Shekar, GreySpark senior consultant and report co-author, added: “As Asia-Pacific firms prepare to comply with global OTC reforms, it presents both a cost and an opportunity to all capital markets participants. The cost of clearing OTC trades is borne by the buyside and sellside alike, but the ability to implement an end-to-end automated clearing solution presents an opportunity to streamline process and reduce operational bottlenecks. Buyside firms should ensure they are prepared to identify the best scalable and long-term solution that will suit their specific needs."
The GreySpark report gives Asia-Pacific buyside firms and sellside investment banks an overview of the wide variety of existing OTC derivatives central clearing requirements across the region, and it assesses the regulatory sophistication of 12 key countries where the products are currently traded in large volumes. The report also examines in detail 12 important OTC clearing broker criteria that all Asia-Pacific buyside firms must consider when preparing to finance long-term arrangements with one or more banks for the central clearing of previously uncleared OTC derivatives trades across a number of different regions.
Andrew McLauchlan, managing director of GreySpark's Hong Kong office, added: "Buyside and sellside firms in AsiaPac will not be able to avoid the advent of OTC derivatives reform, but they certainly have a choice in how early they can act and the extent of their due diligence in preparation for the mandatory deadlines. In this respect, AsiaPac-based firms clearly have a third-mover advantage and should capitalise on lessons learnt by the U.S. and EU before them."