Bearing East – IQ April 2019

It’s difficult to talk in general terms about the derivatives market in Asia-Pacific. Looked at as a whole, derivatives turnover in the region has been growing, and that growth is expected to continue. But activity is concentrated in a few key trading hubs like Hong Kong – the venue for this year’s ISDA Annual General Meeting. A number of other jurisdictions are at much earlier stages of development, and need to establish strong legal and regulatory foundations to encourage further growth in local derivatives markets.

That might sound obvious, but it’s important. In a new ISDA survey of 480 derivatives market participants active in Asia-Pacific, published in this issue of IQ, the existence of a sound legal and regulatory framework was identified as one of the main factors in determining where to trade. In particular, certainty over the enforceability of close-out netting was highlighted as essential to the development of robust and efficient derivatives markets.

There has been recent progress towards achieving that in certain jurisdictions, but – as it stands – there is still ambiguity over how close-out netting will be treated in three of the region’s biggest economies and Group-of-20 members: China, India and Indonesia. Given the importance of close-out netting as a risk mitigant, we believe resolving this issue is the single most important step policy-makers can take to ensure the development of safe, efficient and liquid derivatives markets in their jurisdictions.

The survey highlighted the importance of other regulatory issues, including the cross-border harmonization of rule sets. This has long been a key strategic priority for ISDA, and we recently proposed a set of recommendations to help mitigate fragmentation in global derivatives markets. Central to this is the development of a risk-based framework for comparability evaluations, alongside a predictable and consistent equivalence and substituted compliance process that is focused on outcomes.

Greater consistency between national rule sets would also help, but that doesn’t mean rules necessarily need to be identical in every market. For smaller jurisdictions or those with limited market activity, it may not be appropriate to implement the same rules as those applied in the US and Europe – at least, not at this stage. The most effective strategy for local regulators would be getting those legal foundations in place first.

 

Documents (1) for Bearing East – IQ April 2019

Marking a Milestone - IQ January 2025

It was a different time and a very different market, but 1985 remains a seminal year in the history of over-the-counter (OTC) derivatives – the year that ISDA was established and the very first industry standard document was published. While...

Response to FCA on SI Regime

On January 10, ISDA and the Global Foreign Exchange Division (GFXD) of the Global Financial Markets Association (GFMA) responded to questions from the UK Financial Conduct Authority (FCA) on the future of the systematic internalizer (SI) regime. In the response,...

Response to CSA on Clearing Obligation

On December 19, ISDA submitted a response to the Canadian Securities Administrators (CSA) consultation on proposed amendments to the clearing obligation in Canada. The CSA invited comments on the proposed amendments and on the specific question set out in Annex B...

Derivatives Regulations and Usage in Japan

Japan’s regulatory landscape has generally been supportive of derivatives use by various segments of the buy side. While there are some guidelines on the purposes for which derivatives can be used by certain entities, which are not unique to Japan,...