Transcript of Question & Answer Session Remarks to a panel discussion at the Risk Australia Conference

One – obviously we started the conversation looking at the Australian mandate and one thing that has been rumoured, if not said explicitly, has been the suggestion that the CFTC may extend its mandate from G4 to include Aussie dollar. And if I can throw that back to Jenny, what are the chances do you think of that happening, how likely is that? And perhaps as a …

I'm not a betting person so I'm not going to give you odds, but if an overseas regulator were to consider mandating clearing of Australian dollar interest rate derivatives under both IOSCO and the OTC Derivatives Regulators Group agreements, they would liaise with us, they would consult with us before introducing the mandate and we would seek to coordinate and smooth the implementation of our mandate and theirs to try and minimise the implementation costs.

And obviously I appreciate that you're not a gambling person, but if that were to happen when do you think would be the most likely time?

I'm sorry I've got no insight into the decision making of the CFTC and the other possibility is also a European mandate. You know, the Europeans are considering the product scope of their mandatory clearing requirements. So it's – we're watching just like the industry is watching.

Do these kind of – if you've got an extension of a mandate from both the CFTC and EU, let's assume both of those go ahead, would that present any practical business issues in terms of integrating that?

I'll start with the link between a CFTC clearing mandate and whether that then makes a product made available to trade, so has to be traded on SEF. Just so everyone knows, if a product – if the CFTC makes a product subject to mandatory clearing, it then becomes eligible to be made available to trade, it doesn't mean it has to. So at the moment the CFTC mandate for clearing covers US dollar, Euro, Japanese Yen and British Pound interest rate swaps and North American and European credit default swaps.

In terms of what has been made available to trade, so must be traded on SEF, it's US dollar interest rate swaps and European interest rate swaps, so it's a subset. And that is because for something to be traded on an electronic platform you need to consider the liquidity in that product and whether trading – the transparency that you get from trading on a trading platform – actually if there is insufficient liquidity that could actually worsen the liquidity problem. So I don't think we – while we're very aware that if the CFTC were to mandate Australian dollar interest rate swaps, they would become eligible for – to be made available to trade, it doesn't mean that that's the end game and it's definitely the case. We're monitoring that process.

In terms of the withholding tax issue, my understanding is Treasury is very well aware of the issue and Andrew and Rohan have had many conversations with Treasury and so I'm a little bit more optimistic than you are.

Jenny if I could just stick with the liquidity issue and I think Marcus made an interesting point there with regard to a reduction in trading between Europe and US and certainly when the SEF Rules came in force in October last year we noticed a lot of the Asian banks kept away from some of the US liquidity pools. From a regulatory perspective is there – are you concerned that a perhaps balkanisation of the global market might result from these mandates coming in place, is that an issue that concerns?

Certainly to – the OTC derivatives market is a cross-border market and it – we would be concerned about disrupting the functioning of the market if you made – if you made each jurisdiction a separate market.

But you're not concerned that that's – is that likely? Is that happening?

I've read the ISDA studies that Marcus referenced, whether that is a transition problem, whether when Europe introduces its mandatory trading requirements that resolves itself is an open question. We're monitoring the situation.

Jenny I just wanted to kind of get your view in terms of this, Rohan's just explained a bit of a reluctance from the buyer side to – to prepare until the mandate comes in, obviously there's a slight kind of chicken-egg, is that a concern from you? Would you like the buyer side to be doing more? Should they be doing more?

We carefully considered whether we should extend the mandate to beyond the dealers in our April report and concluded that there wasn't a public policy case at this stage to do so. That doesn't mean that we don't expect that the buyer side, particularly larger dealers, sorry larger non-dealers, fund managers, to have an incentive to centrally clear, and certainly we've seen the early adopters get ready for central clearing, whether it's in preparation for being required to centrally clear or whether, as Andrew mentioned, we expect there to be differential pricing between whether a contract is centrally cleared or remains bilateral. And that differential pricing is driven both by the capital requirements that banks are required to hold for centrally cleared exposures versus non-centrally cleared exposures and the prospective introduction of margin requirements for non-centrally cleared derivatives.

The clearing mandate in Australia, will it be a success or a failure?

I'm not going to change my mind. No it will work.