Central Clearing of OTC Derivatives in Australia – June 2011 6. Consultation Process and Questions

6.1. Consultation Process

The Council agencies have issued this paper to encourage all interested stakeholders to engage in a thorough discussion about implementing central clearing of OTC derivatives markets in Australia. The agencies recognise that many of the issues are highly complex, with uncertainty perhaps heightened as a result of related ongoing developments in international markets. The agencies also recognise, though, that not all stakeholders' interests may be aligned.

The Council agencies welcome comments on any matters discussed in this paper. As a basis for discussion, a number of questions have been suggested below, to which stakeholders might wish to respond.

6.2. Suggested Questions

6.2.1. The potential clearability of OTC derivatives

Q1. Do you consider the product characteristics of any OTC derivatives classes traded by Australian market participants make them amenable to central clearing in general? If so, what classes would you include, and for what reasons? For which classes do you think central clearing is inappropriate, and for what reasons?

Q2. What OTC derivatives traded in Australia would you consider as feasible to be centrally cleared?

Q3. Do you agree with this paper's suggestion that Australian dollar-denominated interest rate derivatives traded in Australia have the volume and characteristics to be viably centrally cleared?

Q4. What would be the costs of moving certain OTC derivatives transactions to central clearing? Please provide as much data or information as possible to illustrate this.

6.2.2. Mandatory clearing requirements

Q5. Do you agree or disagree with the proposed criteria for deciding whether a class of OTC derivatives should be mandatorily cleared? (See point 1 under Section 5.1)

Q6. Do you agree or disagree with the proposed criteria for deciding whether a class of market participants should be subject to a mandatory clearing requirement? (See point 2 under Section 5.1)

Q7. What, if any, exemptions for either products or participants do you think the Council agencies should be considering, and for what reasons?

6.2.3. OTC derivatives central counterparties

Q8.  Do you agree or disagree with the agencies' proposition that CCPs clearing OTC derivatives markets that are systemically important to Australia should be domiciled in Australia, particularly for instruments denominated in Australian dollars?

Q9.  What would be the impact on the local market of mandatory clearing through a domestic CCP? What might be the advantages or disadvantages of clearing through an offshore-domiciled CCP? Please discuss all points where you agree or disagree, in as much detail as possible. Where available, please provide quantitative data to illustrate the impact of various CCP configurations on the costs and risks of individual market participants or the Australian market as a whole.

Q10. Do you consider any changes need to be made to Australian law or regulation to improve a CCP's arrangements for the segregation and portability of client accounts?

Q11. Do you consider any other changes need to be made to Australian law or regulation to improve the handling of collateral posted by market participants for positions cleared offshore?

Q12. Are there any other changes to the regulation of CCPs that should be considered that are particular to the clearing of OTC derivatives?

Q13. Do you agree that interoperability among OTC derivatives CCPs should be encouraged?

Q14. Do you agree that a mandatory clearing requirement might have consequences for efficient outcomes in the market for clearing services? How should Council agencies and market participants look to manage any adverse effects in this area?

6.2.4. Jurisdictional and other matters

Q15. Are there any legal impediments to mandating the clearing of OTC derivatives and the use of CCPs? Are there any legal impediments to mandating the use of a CCP where that CCP is domiciled in a foreign jurisdiction?

Q16. Are there any extraterritorial effects of regulatory reform underway in foreign jurisdictions that should be considered in developing a clearing regime for Australia?

Q17. Are there any other changes to the existing regulatory framework for the Australian financial system that would be desirable to accommodate a move to central clearing of OTC derivatives?

Q18. In the absence of a domestic mandatory clearing requirement, how would Australian participants respond to changes in capital treatment of non-cleared OTC derivatives and global market developments (including the increasing use of CCPs by global dealers)? Do Australian participants expect to centrally clear transactions in products which Australian law does not require them to clear? If so, what is the motivation for centrally clearing these products (e.g. to avoid higher capital charges, offshore jurisdictional requirements, commercial pressure)?

6.3. Next Steps

The Council agencies will be hosting a number of roundtable discussions over the period ahead, and will arrange individual meetings as appropriate. A list of meeting attendees will be made public.

Written submissions are also welcomed; all submissions and correspondence received will be made public, unless specifically requested to be treated as confidential.

The Council agencies request that formal submissions and comments in response to this discussion paper be received by 1 September 2011. (The agencies have decided to extend this deadline from the original due date of 5 August 2011.)

Please direct all correspondence and other requests as follows:

Email: OTCDConsultation@rba.gov.au
Address: ‘OTC Derivatives Central Clearing Consultation’
Reserve Bank of Australia
GPO Box 3947
Sydney NSW 2001