Celent has issued a report on the over-the-counter derivatives markets in Asia and Latin America. It contends that the central clearing of OTC derivatives will become a common feature of markets in those regions in the months and years to come, indeed, that a number of central counterparty clearinghouses will come on-line as early as later this year, and Celent senior analyst Anshuman Jaswal suspects this will change the geography of the markets.
The report begins with a comparison of the turnover across the global emerging and advanced markets. Asia represents roughly 70 percent of the turnover of the OTC derivatives market in the emerging markets nations, Latin America 20 percent. Jaswal says that economic growth in the emerging markets of the two regions under study is “ideally suited to the greater adoption of OTC derivatives.”
But, he adds, they have not caught on as much as they might have. Exchange-traded derivatives remain popular. Perhaps “greater standardization of OTC derivatives as a result of central clearing would make them more appealing to investors.”
The figure below shows great variation from one nation to another. Brazil and Korea each have extremely active exchange-traded derivatives markets, but relatively shallow OTC analogs. Hong Kong and Singapore are both standouts for OTC derivatives turnover, and in each case the exchange market looks like a last-second add-on to the graph. In India and China, neither sort of market seems dominant (but the total turnover in both cases is quite small compared to the above-mentioned four).
In general, the regulatory framework in the leading Asian markets is transparent, and is more flexible than its counterparts in the U.S. or in Europe, so Jaswal writes, “we expect that regulatory arbitrage and OTC derivatives volume might move to Hong Kong and Singapore” from those developed-world sites. He expects that Brazil, too, will be a beneficiary of such shifting of volume toward favored EM locales.
Finally, after a brief discussion of recent levels of trading, the report includes a detailed section on the regulatory framework for OTC derivatives in eleven distinct national markets, considering such common issues as standardization, central clearing, and transparency. What Jaswal has to say about four of the most important is summarized below.
The Republic of Korea is at work on a revision of its Financial Investment Services and Capital Markets Act which will include the standardization of OTC derivatives. After the revisions are adopted, detailed rule-making is expected.
Korea’s regulators have requirements in place for both pre-trade and post-trade transparency, “along with multi-dealer functionality on the OTC derivatives trading platforms.”
There will be central clearing rules covering all asset classes and financial entities.
In Hong Kong, there are no “legislative steps” now contemplated to heighten the level of standardization, but the Jaswal expects that “the implementation of Basel III reforms should help improve the related processes.”
Beginning at the end of 2012 the market in Hong Kong will see the start of local central counterparty clearing of OTC derivatives – the Hong Kong Exchange is itself establishing that CCP. Initially, mandatory clearing will cover standardized interest rate swaps and nondeliverable forwards, though other types of products may well be covered at some point after the initial roll-out.
Separately, the market expects that there will be a trade repository in 2012-13, and a mandatory reporting requirement covering all OTC derivatives trades.
Jaswal expects legislation regarding standardization to be introduced in Singapore by the end of 2012. In the meantime, leading participants in the markets have “pledged to improve their standardization levels.” The legislation will likely include CCP. Further, these rules will probably cover all asset classes, “taking into account systemic risk to and degree of standardization in the local market.”
There are no standard rules in place in Singapore regarding use of single or multi-party platforms or the imposition of transparency either pre or post-trade.
The OTC market in Brazil is already very much standardized. Thus, nothing further is planned in that regard.
A mandatory clearing requirement exists only for exchange-traded transactions. For OTC transactions, “participants are given the option of using bilateral or central clearing.”
The Brazilian regulator requires multi-dealer functionality, and has pretrade transparency requirements for exchange trading but not for the OTC market. In terms of the post-trade regime, both exchange and OTC derivatives trades must be reported to a trade repository.