Asian CCP Recognition: Challenges and Opportunities

Whilst those of us in Europe and America have been focused on the immediate challenges of Dodd Frank (via the CFTC) and EMIR, in the rest of the world these
February 15, 2015 - Editor
Category: Clearing

Whilst those of us in Europe and America have been focused on the immediate challenges of Dodd Frank (via the CFTC) and EMIR, in the rest of the world these new regulations pose an even more complex web to navigate.

Firms within Europe and the US must comply with their new local regulations, but to access a CCP in Asia they typically use a local branch to access the service, rather than a local standalone subsidiary, so they require an Asian CCP to also meet the US and EU regulations to be able to continue receiving service.

As a key part of Singapore’s financial infrastructure, SGX is also Asia’s leading OTC trading and clearing partner for financial and commodity products. Global investors are drawing on SGX’s risk management offerings to hedge today’s volatile world.

To enable customers to manage the major currencies in the region SGX have developed a suite of FX products including futures on INR, AUD, USD, JPY, CNH, CNY, KRW, THB and SGD.

More recently SGX launched clearing for OTC FX Non-Deliverable Forward (NDF) contracts in CNY, IDR, INR, KRW, MYR, PHP and TWD, enabling firms to manage risk in a wider range of currencies with the flexibility of an OTC product. The intention of SGX is to provide customers with a single venue to manage risk in currencies used for trade and commerce in the Asia region, using clearing as the means to eliminate credit risk and so remove barriers to cross-border business.

SGX recognises the urgency and its fundamental responsibility in providing continuity of service, as without regulatory recognition, SGX’s place as a central offshore hub for capital markets activity would be compromised and gradually diminished. This is reinforced by EMIR reaching into the Exchange Traded Markets, beyond the remit of Dodd Frank, therefore affecting SGX’s large ETD execution business in Singapore.

SGX applied for a Derivatives Clearing Organisation (DCO) license with the US to ensure access for US organisations and was granted DCO status on the 30th December 2013. This provides SGX with the approval to provide clearing services to firms within the US from Singapore, offering a compatible solution to new regulations for OTC Commodity and Interest Rate swaps. In Asia, SGX is the only CCP to have achieved a US DCO license, while other exchanges are subject to ‘no action’ relief from the CFTC and have yet to find a permanent solution.

SGX is now expecting to on-board its first FCM with a number of US end clients in the next few months specifically for OTC Commodities – the SGX Iron Ore contract is seen as a global benchmark. SGX was able to continue servicing US clients with its AsiaClear futures which are fully fungible with bilateral swaps. Clients would like the flexibility though to clear swaps and do this through the same global Clearing Member.

The next area is Europe, where there continues to be open dialogue between US and EU regulators on how (or if ) they recognise each others regulations, in order to then recognise each others CCPs. One aspect of the EU granting the US an ‘equivalence’ status is that the CFTC indicated they would allow EU CCPs to take on US members, but not take on US clients. This partial recognition would prevent ESMA and the EU from proving a reciprocal equivalence and potentially hold up an EU-US country level recognition.

Understanding the needs of its global clients, SGX has applied to ESMA for recognition as a Third Country (TC) CCP, based on the findings of an ESMA report to the European Commission (EC), published on the 1st of September 2013. The report to the EC recommended recognising Singapore and its regulations, and therefore CCPs as equivalent to EMIR, opening the way for SGX to be granted Qualifying CCP status.

As Asia’s largest offshore trading and clearing equity derivatives exchange, SGX not only clears for local markets but maintains efficient access to China, Japan and India allowing for continued access to those markets regardless of the onshore jurisdictions recognition . ESMA have also recommended Japan achieves equivalent status, but there is less certainty regarding China and Taiwan, until they move further towards requesting TC recognition from ESMA.

SGX also received a good report from the IMF, who performed an assessment on Singapore and SGX. The IMF report stated “Singapore has a well developed payment, clearing, and settlement infrastructure” and that “SGX is assessed as a sound and efficient CCP with an effective risk management framework”. The report also pointed out that Dodd Frank and EMIR will place new requirements upon Singapore and SGX, but these look to be mitigated by the positive report from ESMA on equivalence.

Indications from the European Commission are that Singapore will achieve equivalence soon, as this quote on the 27th June 2014 indicates:

“I intend to propose shortly that the European Commission adopt ‘equivalence’ decisions that will allow CCPs from five countries outside the EU – Japan, Singapore, Australia, Hong Kong and India – to clear EU derivatives trades.”

This would put SGX in a strong position, having a DCO license and also formal equivalence for the EU. Further challenges may arise in order to be compliant with both local regulations, and US and EU rules, which don’t always align:

  • Trade reporting either single sided, double sided with quite different data requirements
  • No clearing mandate in the EU yet, and even less certainty on which trading location is judged to be relevant either the risk management location, or the booking entity or the counterparty (or all three)
  • Margin periods on ETD products being minimum 1 day in the US and Singapore, and 2 days in the EU
  • The SEF mandate in the US, without any equivalent rules in the EU or Singapore, leaving traders with opportunities to relocate trading activity to swerve US rules
  • The delay to CRD IV – the rules which would massively increase the regulatory capital requirements for non-qualifying CCPs
  • The proliferation of Trade Reporting requirements around the world, affecting counterparties and indirectly SGX to supply relevant data to members

SGX has invested time and effort to front-run all these challenges, rather than hope for an easy way out through recognition or equivalence, and is now poised to continue providing a regional hub for capital markets activity, surfing the wave of regulation and providing a safe haven for members and clients alike.

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