SINGAPORE: Singapore, Hong Kong and Australia will introduce collateral rules for over-the-counter derivatives trading on March 1, part of a global initiative to make transactions in the US$544 trillion market safer.
The new guidelines force financial institutions to post cash or bonds to their swaps counterparties. They will also apply to variation margins, which cover daily market swings, the Monetary Authority of Singapore, the Hong Kong Monetary Authority and the Australian Prudential Regulation Authority said in separate statements yesterday.
Both Hong Kong and Singapore’s rules will be subject to a six-month transition period, their authorities said, while Australia will allow the same for its variation margin requirements, the regulator said. Hong Kong’s timeline takes into account proposed implementation dates in other jurisdictions and industry consultation, according to the city’s regulator.
The phased-in approaches will ensure there isn’t a panic come March, said Kishore Ramakrishnan, director of financial services advisory at PricewaterhouseCoopers LLP in Hong Kong.
The European Union and jurisdictions including Singapore, Switzerland, Hong Kong and Australia missed a Sept 1 deadline to implement the rules for the biggest banks, though the US, Japan and Canada went ahead. The collateral requirement is one of the bedrocks of global regulatory efforts to reduce risk in the swap market following the 2008 financial crisis.
Authorities have pushed for banks, asset managers and other traders to have more cash, securities and other collateral supporting derivatives deals to protect against the threat that one trader’s default could spread risk throughout the financial system. The rules were agreed at the international level to prevent the industry from exploiting differences in standards in jurisdictions across the world.
The EU sparked criticism from the US and Japan earlier this year when it said it would miss the Sept. 1 deadline. The Financial Stability Board, whose members include the US Federal Reserve, the Bank of England and HKMA, called in August for urgent action to prevent the market from fragmenting on national lines.
In a sign that the countries that met the deadline were growing frustrated with their counterparts, Takuo Komori, deputy commissioner for international affairs at Japan’s Financial Services Agency, said on Oct 27 that it was imperative that other countries implement the rules promptly to ensure a level playing field.
Adding to the confusion is the role of the estimated 78 jurisdictions, including China, with rules that mean the return of collateral isn’t guaranteed. While some authorities are looking at exemptions that would free their banks from having to put up money when trading with firms from so-called non-netting jurisdictions, US regulators haven’t shown signs of tweaking their rules.
The regulations apply to trades directly between buyers and sellers in the over-the-counter swaps market. Global regulators estimate that they could eventually require more than 700 billion euros (US$753bil) in collateral. – Bloomberg