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Tougher rules push collateral management in Asia Pacific

Tougher rules push collateral management in Asia Pacific

Uncertainty remains over how the Asian markets will implement new rules governing collateral movement in the trading of over-the-counter (OTC) derivatives as they move to trading on exchanges next year.

The rules on collateral movement are part of broader regulatory measures introduced for OTC deals in line with the  Dodd Frank Act in the US and the European Market Infrastructure Regulation (EMIR) which involved centrally clearing standardized OTC derivatives. Under these new rules, where appropriate OTC derivatives should be traded on exchanges or electronic platforms in order boost regulatory oversight and mitigate counterparty transaction risk.

The regulations also require market participants including banks and asset managers to post collateral when trading OTC derivatives on the exchanges. This measure is expected to take effect on September 1 2016.

Ivan Nicora, CEO Hong Kong branch and Asia Pacific regional head at post-trade service provider Euroclear believes Asian markets are at varying stages of compliance with the OTC rules. It is unclear, however, how fast the region’s markets could fully comply with all of the regulations.

“The one thing which we are still uncertain about is how the Asian markets will apply all those regulations. Some markets need to apply them quickly because they are trading with Europe and US counterparties who are covered by these regulation,” Nicora says. Europe, the US and Japan are currently the biggest OTC markets.

“But every market in Asia will have to comply or apply different parts of these regulations soon in such a way that complies with the domestic requirements,” he adds.

Going forward, Nicora expects huge amounts of collateral will be exchanged between buyers and sellers of derivatives in the region. That should compel clearing houses in Asia to gear up clearing processes and also accept securities, apart from cash, as collateral. Euroclear provides collateral management services to help with the trade of derivatives under the current regulatory regime.

“Our platform will allow clearing members to use a bigger pool of assets that can be already sitting with Euroclear and mobilize them quickly and efficiently,” Nicora says. “So that’s creating a big push for clearing houses in Asia to set up everything that has to do with clearing and start accepting securities as collateral.”

Discussions on these issues were held during the Euroclear Asia Collateral Conference 2015 held on November 18 in Hong Kong. The annual conference was attended by about 200 participants involved in the collateral management industry in the region.

Article Published on The Asset.com


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